JDCMF - Analyzing 13Fs: Scion Asset Management (Michael 'Big Short' Burry)

Summary

• We dive under the hood of one of the most influential hedge fund managers in the world, analyzing Scion Asset Management's moves based on their recently disclosed 13F filings.
• Michael Burry is one of the most universally admired value investors that rose to fame during the subprime mortgage crisis due to his big bet against the US housing market.
• Reported U.S. equity-based assets under management increased by $5.24 billion to $46.53 billion, as compared to the previously disclosed $41.29 billion in the last quarter.
• The "Big Short" entered China big time by buying up significant stakes in Alibaba and JD.com, while also opening positions in Black Knight, Coherent, Wolverine World Wide, MGM Resorts, and SkyWest.
• Scion Asset Management trimmed its exposure to GEO Group and Qurate Retail Group while closing its positions in CoreCivic, Aerojet Rocketdyne, Charter Communications, and Liberty Latin America.

Michael Burry is one of the most influential figures in the investment world and remains widely recognized as one of the most successful value investors in modern history. Ironically, his early career saw him work briefly as a neurologist before he decided to pursue a career in finance. He began investing in stocks in his spare time, and the hobby eventually grew into a full-time career as he launched Scion Capital, his own hedge fund, with a $1 million initial investment from his family in 2000.

His rise to fame and notoriety began in the mid-2000s when Burry became convinced that the US housing market was overvalued and set about finding ways to profit from a potential upcoming crash. He began buying insurance contracts on subprime mortgage bonds, effectively betting against the market, at the same time as other investors poured billions into the housing sector. His life work became immortalized in Michael Lewis's bestseller "The Big Short" and the critically acclaimed movie of the same name, where his character was portrayed by Christian Bale.

However, not everyone remains impressed with his investing style and accomplishments, nor do they necessarily consider him a track-worthy investor. Ongoing criticism of Michael Burry and his philosophy is mostly anchored in the "perma-bear" nature of his investing style. His critics like to point out that he is one of the best examples of an investor with a consistently negative outlook on the macro-environment. Having also kept a relatively active social media and public presence throughout the years, Burry managed to attract a fair share of criticism along the line.

Today's article is based on the data extracted from Scion Asset Management's fourth quarter 13F filing, through which they are obligated to publicly disclose their US-based equity positions. We scrape SEC 13-F filings to find newly disclosed portfolio position changes by institutional investors, along with their most recently reported holdings. While it is not advisable to follow institutional investors' moves blindly for various reasons, recently disclosed holdings can be a useful source of investment ideas and possible targets for further research. This is especially the case when the material from these disclosures is coupled with the data from the 13D filings , which occasionally provide a considerably clearer picture.

Quarterly Overview

As the market sell-off slowed down in the tail-end of 2022, Scion Asset Management reported a slight uplift in their U.S. equity-based assets under management of $5.24 million. The fund increased its assets to $46.53 million, as compared to the previously disclosed $41.29 million in the third quarter. In line with his investing style, portfolio turnover has once again been significant, having turned over nearly his entire portfolio since Q3 2022.

Out of the six reported holdings last quarter, four of them left the portfolio this quarter. Discussing portfolio concentration is to a certain extent pointless, as Burry practices a concentration style that can be compared only to the likes of Charlie Munger. He currently holds shares in only nine companies, leading to a 100% top 10 holdings concentration. Scion added seven new positions this quarter and trimmed exposure to two of its holdings.

New Positions

Alibaba Group ( BABA ): Burry bought 50,000 shares of BABA, the estimated $4.6 million acquisition now constituting close to 10% of the fund's AUM. This purchase occurred while Alibaba was trading at its lowest price since 2016. It is estimated that, per current prices, the company trades at a P/FCF of 16.06x and an EV/EBITDA of 8.69x. This means Burry bought BABA for roughly twelve times the free cash flow. Scion Asset Management likely paid anywhere in the range of $63-$94 for shares of the Chinese e-giant. Alibaba Group is currently being traded for around $95 per share, which makes this likely an already very profitable trade.

JD.com ( JD ) is Michael's second large venture into Chinese stocks this quarter. Scion Asset Management purchased 75,000 shares of the company, which is essentially a direct competitor to the previously discussed BABA. The estimated $4.3 million entry makes JD the 4th largest holding in Burry's portfolio, taking up 9% of the portfolio's AUM. Burry was buying shares of JD at prices between $36 and $59. This trade is also on a slightly less attractive valuation, given that JD trades for a P/FCF of 18.22x and an EV/EBITDA of 13.70x. The company currently trades for $46.97 per share, making it a somewhat less profitable trade.

Black Knight ( BKI ) represents the largest acquisition of the quarter and also the second-largest position in the portfolio taking up about 20% of the AUM. Unlike the two previous purchases, this is in fact a merger arbitrage play, given that Intercontinental Exchange ( ICE ) awaits antitrust approval for the $13 billion deal to go through. Analysts and investors have grown more skeptical of the deal and its ability to pass antitrust regulators, causing the spread to widen . As BKI currently trades at $63.66 per share, the arbitrage opportunity is still wide open if one has any trust in the deal passing regulators. Burry likely acquired shares of the software company between $54 and $66.

Coherent Corp. ( COHR ) is Scion Asset Management's second-largest addition in the fourth quarter. This likely represents an indirect entry into the semiconductor industry, for which the company manufactures parts amongst other things. COHR currently sells for a relatively steep 19.01x EV/EBITDA and 35.65x P/FCF, making it far from a "cheap" company. Burry entered the position in the $30–41 range, and COHR is currently trading at around $42.71 per share.

Wolverine World Wide, Inc. (WWW): is probably the most beaten-down new addition. Dr. Burry's portfolio added 356,101 shares of WWW in the fourth quarter after the company lost more than one-third of its market cap in less than a year. The stock traded in the $10-$18 range during Q4, and it's possible Scion Asset Management went on a buying spree after the stock fell off a cliff in early November amid a disastrous earnings report . After getting crushed by the market, the stock sold for around five times the free cash flow. WWW has an incredible 36% year-to-date gain at this point, now trading at more than $15 per share. Scion Asset Management and Michael Burry also opened minor positions in MGM Resorts International ( MGM ) and SkyWest ( SKYW ).

Reduced Positions

GEO Group Inc. ( GEO ) was probably one of the most discussed Burry stocks over the past couple of quarters. The $15 million position made up 37% of the portfolio as of last quarter, and it would seem Burry decided to take some gains off the top. Even after dumping close to a million shares of GEO, it still remains the largest holding of Scion Asset Management. Since the 13F filing was disclosed, GEO's share price has collapsed by more than 25% and currently sells for around $9.37 per share.

Qurate Retail ( QRTEA ): While mostly out of the spotlight, Qurate has been quite possibly the most intriguing Burry purchase as of late. We are discussing a "Cigar Butt" investment in a declining linear TV video-commerce retail industry. QRTEA was one of the worst-performing stocks in 2022, down more than 60%, and Burry took the chance and first entered the position while it was trading in the $2-$4 range during Q3 2022. This quarter the fund dumped 3.5 million shares cutting its position by 70%.

Closed Positions

Liberty Latin America ( LILAK ) is the Caribbean flower of the "Cable Cowboys" legacy telecom empire. The Latin American branch of John Malone's empire was created in 2018 when LILA got spun off from Liberty Global ( LBTYA ). The company truly went nowhere for years on end, having difficulties executing its planned $450 million in operational synergies. However, Burry seems to have gotten on the right side of the deal with this stock, capturing some of the first positive price action in a long time. After getting into the company in the $6–8 range, Scion Asset Management went for a payday as the stock hit double-digits in the fourth quarter, closing out the position. Michael Burry closed out his stakes in Charter Communications ( CHTR ), CoreCivic ( CXW ), and Aerojet Rocketdyne ( AJRD ) as well.

Final Overview

Largely unrelated to one's personal attitude or opinion of Michael Burry, there are few 13F's in the industry that are more noteworthy of such attention than Scion Assets Management filings. Michael Burry is a highly respected figure in the investment world, known for his keen analytical skills, contrarian approach, and willingness to take bold bets on companies that others had overlooked or dismissed. Furthermore, in a concept George Soros defined as the "theory of reflexivity", which we took the liberty to discuss here , his disclosures matter for a different reason. Just as is the case with famous investors like Buffet, Marks, Klarman, and others, their willingness to associate their reputations with investments can lead to a significant change in the underlying fundamental position and price. Dr. Burry's willingness to consider potential investments, let alone disclose them within his 13F filings, can lead to millions of dollars of inflows and outflows into the above-mentioned stocks.

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