In this segment of the Motley Fool Money podcast, host Chris Hill and senior Fool analysts Jason Moser, David Kretzmann, and Jeff Fischer look at the franchise restaurant segment through the jaundiced eye of Kynikos Associates founder Jim Chanos, who isn't too pleased with what he sees, particularly in the case of Dunkin' Donuts (NASDAQ:DNKN) and QSR. The guys explain what he's basing his short bets on, and consider whether they would follow his lead. They also discuss shorting more broadly.
A full transcript follows the video.
This video was recorded on April 27, 2018.
Chris Hill: Let's go back to restaurants for a second. Separate from the earnings that were reported this week, the restaurant industry was also in focus, Jeff, because Jim Chanos, the famed short-seller, was on CNBC talking about some of the businesses that he's shorting through his fund. Two of the more well-known are Dunkin' Brands and QSR, which is Restaurant Brands, which is the parent company of Burger King and Tim Hortons.
First, in terms of Chanos, I was saying when we were meeting earlier today, I just kind of like the guy, because as short-sellers go, he lays out his ideas there not like he's trying to sell me on anything, he's just sharing what he thinks. You're someone who has a lot more experience with shorting stocks than I do. What is your opinion of Jim Chanos?
Jeff Fischer: He is straightforward. Like you said, he's a matter-of-fact. And he's a good thinker, definitely. He's nuanced. His critique of the restaurant industry is focused on franchise models. He sees the franchisee being not always treated well by the business itself. And he thinks, ultimately, the model is flawed in various ways. And he has a point. You see a lot of franchise models slowly degrade over time because attention isn't given to individual locations, and their income is relatively modest. These are asset-light businesses for the owners as well, so if things start to go south, there's not much there to back up the value of the business.
That said, shorting is very tough, as you know, Chris. And I don't think I would short Dunkin' Donuts myself. It's too well a known brand in this country, especially on the East Coast here, and it's not that expensive. He's shorting on valuation, which is also risky, because the market can disagree with you for a long time. He's been short Tesla for the past four years --
Hill: How's that working out?
Fischer: The stock is up less than you would think, from the mid $200s to $290, now. So, it's only up a little bit. He pointed that out as a success in this roaring bull market. And that's true. For the short to not go up that much in a bull market, that's a good call. And yet, he spent the time focused on these shorts instead of finding a stock that has doubled or tripled in the past four years. So, it's still an expensive trade off. Shorting is difficult, not for everybody, not even for a majority of people, to do.
Hill: I don't know. You can think whatever you want about Tesla, but that just seems like a stock that you should just stay the heck away from in terms of shorting.
Fischer: He has a lot of good arguments for shorting it, as well. He thinks Musk keeps over-promising and under-delivering --
Hill: Well, he's right about that. [laughs]
Fischer: -- and that'll catch up to him eventually. The finances of Tesla are challenged. They'll have to raise more money again. Yeah, he's staying short that stock, he says.