CGI Group shares drop after Chanos makes big short bet

Wed Dec 4, 2013 5:44pm EST

Jim Chanos, Founder and Managing Partner of Kynikos Associates LP speaks at the Reuters Global Investment Outlook summit in New York, November 19, 2013. REUTERS/Mike Segar

Jim Chanos, Founder and Managing Partner of Kynikos Associates LP speaks at the Reuters Global Investment Outlook summit in New York, November 19, 2013.

Credit: Reuters/Mike Segar

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(Reuters) - Prominent short-seller Jim Chanos has taken a major short position in shares of CGI Group Inc (GIBa.TO) (GIB.N), the parent of CGI Federal, which is the main contractor behind the U.S. government's glitch-plagued HealthCare.gov website.

CGI Group's U.S.-listed stock dropped as much as 5.9 percent after Newsweek first reported early Wednesday that Chanos counts the stock among his "largest short positions." CGI shares closed down 4.2 percent at $34.66 on the New York Stock Exchange, though the stock is still up more than 50 percent this year.

Chanos, in a 10-page memo sent recently to clients, a copy of which was obtained by Reuters, outlines why he believes CGI's corporate performance and stock price warrant scrutiny.

Chanos cited the "PR mess with the rollout of the Affordable Care Act Exchanges, which could reduce the likelihood of future government contracts" and said that "growing through acquisitions hides deteriorating fundamentals" at CGI.

HealthCare.gov is the website designed to let Americans sign up for health insurance under the exchanges created by the Affordable Care Act, popularly known as Obamacare.

Chanos's memo also pointed to CGI's deteriorating cash flow and falling bookings of new business and said CGI has used various "accounting conventions" that have improved its earnings, in part by recognizing revenue already counted by Logica Plc, a big technology company that CGI bought last year.

Chanos also cited CGI's exposure to U.S. federal government spending, which is approximately 14 percent of the company's total revenue, noting that the second round of sequester is coming in January. While the sequestered amount will drop from $986 billion to $967 billion, it is expected to squeeze agencies even more as they will have run out of creative methods of finding funds.

Chanos, the founder of hedge fund Kynikos Associates, was not available for comment. Kynikos has around $6 billion in assets under management.

Lorne Gorber, global spokesman for CGI, said he has not read the report from Chanos and has been in touch with the firm asking for a copy of it. "I'm still trying to get my hands on the referenced 10-page memo," he said.

"I can assure you we've never had a conversation with him, though I invited him to call me when I sent him a note to ask for his report."

Gorber defended CGI's performance. "Fundamentally, our results are there and I think investors should analyze them for what they are and do their due diligence the same way that we would if we were buying a company," he said.

"Ourselves, we just bought $100 million worth of stock last week," he added.

As of Tuesday, about 50.8 million shares traded of CGI's 277.47 million outstanding shares - 18.3 percent of the float - were being shorted, according to data firm Markit.

CGI Group has been an investor favorite for nearly five years, helped by its acquisition of European rival Logica. But headlines on troubles at the federal health insurance website, a key component of President Barack Obama's healthcare reform, are drawing growing attention to the company, often called Canada's most valuable technology firm.

"Media attention on CGI's role in the 'Obamacare' healthcare exchange website has been negative," Paul Treiber, analyst at RBC Capital Markets, wrote in a reaction to the Chanos news. "However, CEO Mike Roach on CGI's Q4/F13 call in November indicated CGI's pipeline is continuing to expand and it is receiving support from clients, which to us indicates that the reputational impact to CGI's business may be limited."

RBC has an "outperform" recommendation on CGI shares.

(Additional reporting by Leah Schnurr in Toronota; Editing by Jan Paschal and Leslie Adler)

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