Hedge fund manager Jim Chanos  is president and founder of Kynikos Associates. As an investment company focused on short selling, it is not a surprise Chanos would target the entire PC sector. Chanos cites the risks of technology disruptions as one of the key reasons to dislike the PC market, adding that it is hard for a company to be prosperous, by cutting costs.  (Full video of interview below)

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Chanos specifically cites Hewlett-Packard (HPQ) . HP’s problem is that it did not property, or adequately, invest in research and development over the last 10 years. The impact on HP is apparent: HP is not a leader in cloud or mobile, two sectors that continue to grow significantly. Chanos said to look at Kodak as an example of a company falling behind because its technology trailed competitors.

Technology Generally a Disruption

Digitization and the Internet changed the landscape for companies. Business environments are changing faster than ever. The PC sector is now considered a value-trap, because it was healthy 10 years ago, but now the sector offers little upside.

Technology is also impacting retail. In the retail space, Chanos predicts that there will be lots of “road kill.”

Short-Selling Still Risky

Chanos learnt from experience to be cautious in the art of short-selling. He mentioned that AOL (AOL) was a short-sale in the 1990’s at $8. Chanos finally covered his last short share of AOL at $80. The bearish bet was at the time, based on an analysis of AOL’s financial statements. At that time, he thought the business was not sustainable based on what the financial sheets were saying.

Other Thoughts:

Market Outlook

Chanos is currently more cautious on US equities. Indices are near multi-year highs, so investments are not as attractive as it was before.

Top-5 Bubbles

Chanos lists his top-5 favorite bubbles. Worth noting was Enron, which marked the end of the dotcom bubble. This ended the speculation of the 1980’s and 1990’s, an era which has yet to come back.  

List of top-5 bubbles begins around the 23:18 mark:

Investing Ideas

Based on commentary from Chanos, investors might want to decide if the PC sector really is on a permanent decline, or if companies will restructure successfully:

1. Hewlett-Packard Company ( HPQ): Offers various products, technologies, software, solutions, and services to individual consumers and small- and medium-sized businesses (SMBs), as well as to the government, health, and education sectors worldwide. Market cap at $33.61B, most recent closing price at $17.25.

Bloomberg BusinessWeek covered the decline in HP’s management in a recent publication. Chanos did not think cutting costs would reverse HP’s fortunes.

HP’s timeline for restructuring is at least 5-years. It is not impossible for the company to improve sales in the interim: improving quality and design for printers, notebooks, and ultrabooks would be a start.

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2. Dell Inc. (DELL): Provides integrated technology solutions in the information technology (IT) industry worldwide. Market cap at $22.79B, most recent closing price at $13.12.

Shares are up nearly 30% in the quarter, after it was circulated that the company wants to privatize.

Dell struggled to improve profit margins in selling computers. The company expanded its online offering by selling peripherals, printers, cameras, and other electronics. The diversification failed to improve computer sales. Dell does not have a growth strategy in the corporate space.


3. AOL, Inc. (AOL): Operates as a Web services company that offers a suite of brands and offerings for the worldwide audience. Market cap at $2.51B, most recent closing price at $29.93.

AOL management maintained a shareholder-friendly position in maximizing value. The company monetized its patent portfolio, sending shares up by 130% from its 52-week low.

In the retail space, a showdown between online and traditional retailers will play out. The company to watch is:

4. Amazon.com Inc. ( AMZN): Operates as an online retailer in North America and internationally. Market cap at $122.39B, most recent closing price at $270.19.

Market skepticism remains high that the online e-tailer can justify its lofty valuation. Savvy shoppers are using storefront-based retailers to try products, and are then buying them for less at stores like Amazon.




Written by Kapitall's Chris Lau