Chanos Shorts Hewlett-Packard Shares, 'the Ultimate Value Trap'

Thursday, 19 Jul 2012 07:21 AM

By Dan Weil

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Legendary short-seller Jim Chanos, head of Kynikos Associates, has staked out a position against Hewlett-Packard, the world’s largest personal-computer maker.

The stock represents “the ultimate value trap for investors,” he said at an investment conference Wednesday. “They’re destroying value.”

HP has expanded in recent years through buying other companies. It has made $37 billion of purchases in the last five years, Forbes reports.

Trying to execute growth via acquisitions “can be a disaster,” Chanos says.

HP’s strategy simply reflects the fact that “they’re in declining businesses,” he says, according to The Wall Street Journal. “They’re hiding their R&D spending through acquisitions,”

The declining businesses he referred to are PCs and laptops, HP’s staple products. Tablets and other mobile devices are stealing sales from them.

The slide will continue, Chanos says. “People will still buy PCs, they just won’t make as much money.”

At just five times expected earnings for the next year, HP stock is certainly cheap, Chanos acknowledges. But, “it may be cheap for a reason,” he says, alluding to the weakness of HP’s core business.

Not everyone is bearish on the company. “HP reported second-quarter results that suggest signs of stability for the wounded technology giant,” writes Morningstar analyst Michael Holt on the research concern’s web site.

“Our confidence in the firm's multi-year turnaround effort continues to build, as the new management team implements a systematic and methodical approach to the issues HP has struggled with recently.”





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