Kynikos Associates Founder Jim Chanos told CNBC on Thursday that he just closed a bet against Chinese coffee chain Luckin on Thursday after first taking a short position earlier in the year on advice from fellow short-seller Carson Block and his firm, Muddy Waters Research.
Luckin Coffee is down more than 70% on Thursday after it revealed in a government filing that its chief operating officer fabricated 2019 sales by about 2.2 billion yuan ($310 million).
“We were short thanks to Muddy Waters, who urged me to take a look at it back in February,” Chanos said. He added that his fund covered the short position in pre-market trading on Thursday.
The 2½-year-old company, which had aspirations to overtake Starbucks as China’s top coffee chain, advised investors against relying on its financial statements and earnings releases for the nine months ended Sept. 30.
“Luckin’s a great example of — when people talk about banning short selling or restricting short selling. This stock was being talked about by the fundamental short sellers in the community in January and February as a fraud,” Chanos said. “It’s one of the things that short-sellers do: They’re the real-time financial detectives.”
Muddy Waters, led by founder and Chief Investment Officer Carson Block, said on Jan. 31 that it was short Luckin after reviewing an 89-page report alleging the company’s practices were fraudulent. Block rose to prominence nine years ago when Muddy Waters published a negative report on Chinese company Sino-Forest, which was ultimately delisted from the Toronto Stock Exchange.
Chanos said he took a look at Luckin at that time and determined that he, too, would make a financial bet against the Chinese coffee chain.
He said on Thursday that companies like Luckin represent an “overly aggressive” class of mega-growth companies that use underhanded methods to obscure expenses like compensation by paying their employees in equity.
“We saw it this morning with Luckin: You have to avoid these Chinese companies like the plague,” Chanos said.
“How many times do investors have to be burned in these companies that are just too good to be true? Growing 40% to 50% a year, with all kinds of odd transactions with affiliates. Variable-interest entities based in the Cayman Islands …” he added.
Chanos warned CNBC viewers on Thursday against piling into “virus stocks” that may have seen a boost from the temporary COVID-19 lockdown.
“One area I would warn people about for example is the virus stocks,” he told “Halftime Report” host Scott Wapner. They are “doing well right now in this enforced lockdown. A lot of these companies are really not structurally growth stocks that are trading at 30, 40, 50 times earnings because they are going to do well in the first and second quarters of 2020.”
He named Zoom Video, Teladoc and Clorox as companies that have seen a burst in sales amid the stay-at-home trend. Shares of Zoom Video and Teladoc soared 85% and 94% this year respectively.