Jim Chanos, founder and president of hedge fund Kynikos Associates, has a better eye for when a company is verging on failure than poised for growth. Thus, he dedicates most of his fund to short positions. Famous examples include his prescient calls on Enron and Baldwin-United, which he shorted.
Chanos also has $292.3 million in long positions, the two newest of which, according to his updated third quarter portfolio, are Starbucks (SBUX) and Occidental Petroleum Corp (OXY). He identifies both optimal long and short positions through fundamental analysis.
Chanos bought 142,000 shares of Starbucks in the third quarter for $50 per share on average, a 2.5% weight in his portfolio. Starbucks’ stock increased 5% year to date.
Starbucks is the premium coffee, tea, food, and beverage-related accessories company that operates primarily through company-owned retail stores.
In the fourth quarter, reported Nov. 1, the company had an 11% year-over-year revenue increase to a record $3.4 billion, with global comparable store sales increasing 6% and Americas comparable store sales increasing 7%. Earnings per share were $0.46, compared to $0.47 the previous year, which included a $0.10 non-routine gain.
The company’s operating margin expanded 60 basis points to 15.4% from 14.8% the previous year, which included a 100 basis point non-routine gain. Starbucks in the fourth quarter increased its dividend 24% to $0.21 per share.
In November, the company announced a radical move into tea with the purchase of Teavana Holdings Inc. (TEA) for approximately $620 million in a deal expected to close by year end.
Starbucks has a P/E of 28.5, close to a two-year low. It also has a P/B of 7.6 and P/S of 2.9.
Occidental Petroleum Corp (OXY)
Chanos paid $87 per share on average for his second new buy, Occidental Petroleum Corporation. Its stock price has declined 21% year to date.
An international oil and gas exploration and production company, Occidental Petroleum Corp also owns OxyChem, a North American chemical subsidiary.
In the third quarter announced Oct. 25, the company reported $5.97 billion in net sales, down from $6.01 billion a year previously. Net income fell to $1.38 billion from $1.77 billion a year previously. Diluted earnings per common share also declined to $1.69 from $2.17.
Earnings fell in Occidental’s oil and gas segment due to lower product prices and higher costs, partially offset by higher oil volumes. Earnings at its chemical segment also declined due to lower prices across most product lines. On its midstream segment earnings increased, reflecting higher margins in its marketing and trading businesses, partially offset by lower gas processing and pipeline businesses income.
Occidental is trading at relatively low valuations: a P/E close to a 10-year low at 10.5, P/B ratio close to a three-year low at 1.6 and P/S ratio at 2.6 close to a three-year low.