ZM - 13-F Shocker: Michael Burry Loads Up On China And Regional Banks

2023-05-16 18:13:12 ET

Summary

• 13-F filings for Q1 came out earlier this week, offering a wealth of information about what stocks big-name investors are buying and selling.
• Of all of the 13-Fs, Michael Burry's are consistently among the most interesting.
• Burry appears to have loaded up on China and US regional banks. What's he thinking? We dig in.
• Another hidden gem from the filings: The stock that Michael Burry and Warren Buffett are both buying.

By law, large institutional investors are required to report their holdings at the end of each quarter on form 13-F . Typically, released 45 days after the end of each quarter, these reports are a treasure trove of information about where the biggest names in finance are putting their money. For example, if you want to see what Warren Buffett is buying at Berkshire (BRK.A) (BRK.B), you can simply look it up when the report comes out. However, the 13-F report I most look forward to each quarter comes from Dr. Michael Burry, the investor made famous by The Big Short . For the few of you who aren't familiar, Burry made a huge profit betting against the subprime housing bubble in 2007 and has made a series of excellent value plays since, including buying GameStop ( GME ) before its massive run.

Burry's latest 13-F filing is out , and it's a puzzler. Michael Burry appears to have doubled down on Chinese stocks and appears to have loaded up on regional banks in March, including the now-defunct First Republic ( FRCB ). Burry had tweeted (perhaps sarcastically) that he was wrong to say sell , and that he underappreciated the willingness of investors to buy any small dip in stocks. The broad market has been in a futile tug-of-war for about a year, leading both bears and bulls to declare victory at times, only to find the tables turned a few weeks later. However, this belies the fact that mega-cap tech is up huge for the year, in many cases on nothing more than CEOs repeatedly whispering the phrase "artificial intelligence" in quarterly earnings calls. Small caps and financials, on the other hand, have gotten crushed over the past few months, with dip buyers having lost their invincibility.

Burry has a reputation as a very sharp, calculating investor, but some of the regional bank plays don't make sense to me. It's worth noting that there are limitations to 13-F filings. First, they're delayed 45 days, and second, they don't show short positions, bonds, swaps, or foreign holdings.

For example, during the pandemic, it was well-known among professional traders that certain meme stocks had implied volatility in their options that bordered on absurd levels. So when you saw "XYZ hedge fund manager" showing that they owned AMC Entertainment ( AMC ) in their 13-Fs, they actually might have been long, but they more likely might have been selling options and using the stock to hedge.

To this point, when we see these 13-Fs like Burry's, there's a lot we don't know. We don't know if there are short positions hedging the long positions, we don't know if he's 80% in cash and the other 20% in stocks is being reported, and we don't know if he even still owns these. With this in mind, here's what Burry is showing for Q1.

Michael Burry's Holdings

JD.com ( JD ) clocks in as Burry's biggest holding, while Alibaba ( BABA ) is his second biggest. Burry has written tweets implying that the Western media is getting the situation in China wrong ( On Xi, Burry tweeted that "the old boss is the new boss" ). Is it worth buying China here? There's risk, but there's also clearly value. I don't think this is crazy from Burry here. Alibaba is under $90, while JD is under $40. If you think China is anything better than a worst-case scenario, I think it's likely that you'll be rewarded over a five-year timeframe by investing a small amount into leading Chinese stocks. Obviously, this isn't necessarily true for random small caps and IPOs that you see in the news for market manipulation over there, but I believe there's some opportunity in China for risk-tolerant investors. Apparently, Burry does too.

Signet Jewelers ( SIG ) is Burry's third-largest holding. This one looks more like a classic Burry play, trading for about 6.6x earnings with decent projections for the future. I briefly looked at their past financial statements - profits are all over the place, but they always have an operating profit . However, the stock has gotten much cheaper over time on a PE basis, so even if profits were to recede to pre-COVID levels, the stock would still be fairly cheap. Perhaps there are structural issues that will bite them in the long run, but you're clearly getting good compensation in the stock at today's price.

Burry also bought Zoom ( ZM ), which was once among the highest flyers in the Nasdaq ( QQQ ), and now is relegated to has-been status. I don't know the logic here because I don't see how Zoom can compete with companies that are willing to offer video chat for free or as a bundle. Maybe Burry sees another COVID wave and work-from-home in jurisdictions like California? I can't figure this one out.

Burry also bought a lot of banks. The biggest buy was New York Community Bank ( NYCB ), which bought the carcass of failed Signature Bank ( SBNY ). It's widely thought that NYCB got a great deal on Signature , so this buy makes sense. Of course, banks do better in higher-rate environments if they're able to keep their deposits, but if they lose deposits then they can rapidly collapse. Some of Burry's other buys make less sense to me.

Burry snapped up shares of the following:

• Western Alliance ( WAL )
• PacWest ( PACW )
• First Republic
• Huntington Bancshares ( HBAN )
• Wells Fargo ( WFC )

Of these, First Republic went to zero, PacWest is in dire trouble, and the others so far haven't proved the dip buyers right. There are some possibilities here again. Burry had congratulated the dip buyers but perhaps overestimated their power. Tens of thousands of retail investors bought the dip in Silicon Valley Bank and First Republic thinking that they would get a bailout from the Biden administration. Instead, they found themselves out their entire investment in short order. It's not clear whether Burry rode First Republic to zero or not, but a lot of people did. Everyone who has a career in the stock market has a few of these as well. The trick, however, is generally to cut losers while letting winners run. It sounds cliché, but it works.

Where Burry and Buffett Agree: Capital One ( COF )

One final nugget from the 13-F filing is that Burry bought Capital One and that COF was one of his larger buys. This is notable because Berkshire Hathaway also loaded up on Capital One. Anytime Michael Burry and Warren Buffett agree on a stock, it's worth thinking about buying.

Capital One trades for about 7.4x 2023 earnings estimates. That's dirt cheap. If you look at Capital One's 10-Q and 10-K filings, you'll see that their business isn't rocket science. In Q1, Capital One paid an average of 2.4% on deposits and earned an average of 18% on credit card loans. They have other consumer and commercial loans as well that earn less, but that's a huge spread. When you're charging 18%, 20%, or more on credit cards, you simply don't have the duration problems that other banks have. They don't even have much credit risk due to the whopping levels of yields their customers pay. It's objectively far riskier to lend 800 FICO tech employees $3 million 2.5% interest-only mortgages than it is to charge 20% interest to the general public with basic due diligence. More people will default, but it's far less dependent on your assumptions about the world and far better compensated by the interest rate you charge (which is far higher than in the past). Even if unemployment sharply rises, the 2008 recession showed that most people will still pay their credit cards.

I'm not going to try and argue that Capital One is recession-proof, but this is a business trading for a huge discount to its earnings power. The dividend isn't the juiciest on Wall Street, but you can take the 2.7% yield here and get great earnings power over the coming years.

Bottom Line

13-Fs are out for Q1, and there's a lot to unpack here. Burry has some plays that make sense to me - and some that don't. Of Burry's plays, Capital One looks like the best, while I disagree that some of the weaker regional banks are worth buying. What do you think? Share your thoughts below in the comments!

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