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Why Chanos Rips Seagate

Dee Gill

From the looks of trading in Seagate Technology (STX), Jim Chanos is no David Einhorn. Chanos bashed Seagate as a value trap in a presentation at a major investment conference last Wednesday, but the damage so far has been minimal.

STX Chart

Really, it’s nothing compared to the damage fellow short-seller Einhorn has wrecked on shares with similar presentations. The chart below is a reminder of the losses that followed his Green Mountain Coffee Roasters (GMCR) presentation to the Value Investing Congress in October 2011. That’s the 15% fall just in the first few days.

GMCR Chart

Of course, it's easier to knock a high-flyer off its perch than beat down an already beaten-down stock, and Green Mountain's PE ratio has spent time in the clouds, while Seagate's PE ratio has been well below 10 of late.

Einhorn, interestingly, has been a big Seagate buyer in the past.

Chanos’ presentation at the annual Sohn Investing Conference last week hit at all hard disk drive makers, not just Seagate. He contends that that there’s already an oversupply of computer storage space in the world, and demand for it will continue to shrink as new devices like tablets depend more and more on cloud services. Who is going to buy hard disks as fewer PCs are manufactured and fewer people own them?

Chanos pointed out Seagate as a particular value trap for a couple of reasons. That rising share price seen in the Seagate price chart comes from profit margin increases – higher product prices – that are squeezing the PC manufacturers to death. Chanos sees them as unsustainable. Seagate insiders have been selling shares, and a key executive quit last week. Then there’s the goodwill, which makes accurately reading some of the other financials more difficult. Seagate is a $14.41 billion market cap company with about $3.31 billion in annual free cash flow and some $969 million in goodwill and intangibles on the books.

STX Goodwill and Intangibles Annual Chart

Chanos, president and founder of Kynikos, is most famous for shorting Enron at just the right time. In more recent years, he correctly called a slow-down in China’s growth, although he has predicted a bigger crisis than has yet come to pass.

There’s still plenty of time for investors to take Chanos’ Seagate warnings to heart. Note that Einhorn’s damage to Green Mountain played out for months, eventually carrying the share price down some 70% losses.

But by the way, Einhorn is buying Apple (AAPL) now. Einhorn has also talked up gold.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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