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‘I live in constant fear’: James Clunie takes on Buffett
by Dylan Lobo on Jul 08, 2014 at 10:49
It takes a brave man to go against Warren Buffett and Jupiter’s James Clunie has done this not just once recently, but three times.
His most recent challenge came after in-depth analysis unearthed some worrying accounting practices at one of Warren’s Buffett’s holdings.
Clunie (pictured) used Beneish’s mathematical formula – which measures financial ratios and eight variables to determine whether a company has manipulated its earning (M score) – to decide there was something not quite right about US infrastructure construction company Chicago Bridge & Iron (CB&I).
This prompted him to open a short on CB&I through his £260 million Jupiter Absolute Return fund. Buffett’s Berkshire Hathaway owns around 12% of the firm. CB&I’s high M score related to its acquisition of Louisiana-based Shaw Group in 2013. ‘The accounting linked to that acquisition is a major issue,’ Clunie explained.
‘There is some interesting accounting around the purchase, which appears to allow lots of management discretion on outcomes. They can legally alter how things look and I’m not sure why Warren Buffett has a holding in this firm.’
Clunie was vindicated as shares in CB&I crashed in June after a short-seller report from Prescience Point Research Group suggested CB&I had used ‘creative acquisition accounting to conceal losses’ and claimed the firm was overvalued by around 50%. Clunie reduced his short to more ‘modest’ levels in the aftermath.
‘While it’s fair to say I’ve probably got a shorter-term horizon than Buffett, I can’t work out what he sees in IBM. They appear to have aggressive accounting practices and carefully time their share buybacks. These really messy accounts make me suspicious and there are also a lot of headwinds in its core business.’
Clunie continues to short IBM, although this position has been pared recently, and closed his short on Tesco before last month’s negative trading update. There is a chance Clunie could reopen the short though.
‘This won’t be a quick turnaround story. Tesco has a lot of hard work to do and supermarkets don’t like price deflation.’
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