Friday, July 19, 2013

Chanos put CAT in the litter box....Did it need his help?

I have a bone to pick with market participants!

Let's begin with a disclaimer.  I currently own Caterpillar (CAT), representing roughly 1.5% of each of our two strategies. We consider that a relatively lite position. CAT has been a familiar name in our investment thesis for the past three years, in varying degrees of exposure, as the emerging global infrastructure build-out argued for CAT to be a primary beneficiary of demand for equipment of all types.  

Their acquisition of Bucyrus added to the cat's meow, at least it was supposed to, as the company's product offering expanded meaningfully into the mining equipment space.  This was meant to capture the global supply/demand imbalance where miners could hardly get metals and raw materials out of the ground fast enough to meet growing needs especially of emerging market countries.  

As we've been plowing our way through 2013 and witnessing sluggish growth in the US, ongoing recessions in Europe, and most notably, a slowdown in China (not to mention in other EM countries, several of whom have had to deploy counter-cyclical policy responses such as tightening interest rates to defend weakening currencies and to fight inflation), the cat has been seemingly de-clawed, as the market has taken the stock price down from early-February levels in the high 90s down to 80-ish before rebounding to the high 80s of late.

Now to the bone to pick....

This past Wednesday, at a conference in NYC sponsored by CNBC and Institutional Investor called Delivering Alpha, a line-up of celebrity investors were present to opine on markets, policy and various investments.  Jim Chanos, of shorting-Enron fame among other notable achievements, was rightfully among the speakers.  He commented that he was betting against CAT, upon which, the stock immediately tanked!

My comments have nothing to do with Chanos....he's earned his celebrity status over many years of impressive performance and insights into complex matters.  

My issue is with markets...did the market really need to hear that Chanos is short CAT in order to sell the stock off close to 3% as the words left his lips?  Did he impart some new information, formerly unknown to market participants, that created a deserved revaluation of the company, especially to that degree?  (There are some who'd argue that, after all, into Chanos' short, had to be someone, perhaps of lesser fame, or not, going long)!

If the market wanted to put CAT into the litter box, it didn't need Chanos' short position to get it there.  Plenty of solid fundamental issues face the company that have caused the revaluation from last years addition to those noted above, you could add management's misstep in acquiring ERA Mining Machinery and its subsidiary Siwei last year...a Chinese company that CAT acquired in June 2012 for $653mm and by Jan 2013 had to write off almost all of that amount ($580mm) due to subsequent discovery of "deliberate, multi-year, coordinated accounting misconduct".  Or you could note the expensive acquisition of Bucyrus which has presented integration and synergy challenges coincident with the global mining sector suffering under the cloud of slowing growth and over-supply of machinery in places like China and other EM countries.  Or you could note the rapid technology transfer (aka: pilfering) that has allowed CAT's competitors in EM countries to become more formidable.

In any event, the reasons are ample to be cautious on the stock, and depending on one's view of the global growth outlook in coming quarters relative to the pounding that the stock has taken, one may decide that current valuations properly price upside opportunity...or not.  But to tag the stock 3% on a celebrity short-position, begs the question as to whether such emotional behavioral repricing might just be the bigger opportunity after all!  Just a thought.........

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs including Caterpillar (CAT).  Positions may change at any time without notice.

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