PACW - Michael 'Big Short' Burry Is Teaching The Market A Lesson

2023-05-18 04:12:29 ET

Summary

• Scion Asset Management, run by famed investor Michael Burry, submitted its 13-F report lately.
• The investment company heavily bought into battered U.S. regional bank stocks.
• 13-F disclosures can tell investors where the smart money flows.

Famed investor Michael Burry, who has risen to notoriety after making timely and shrewd bets on the housing market before an unprecedented crash decimated the industry in 2007, loaded up on regional bank stocks like Western Alliance Bancorporation ( WAL ), PacWest Bancorp ( PACW ), Huntington Bancshares ( HBAN ) and others during the first-quarter. By buying U.S. regionals, Michael Burry has positioned himself against the broader market and bets on a recovery of the community banking market. Other big investors like Bill Gross and Warren Buffett have also invested heavily in bank stocks during the first-quarter. I believe investors should take note of where smart investors are putting their money as there is evidence that the U.S. regional bank market is recovering!

Scion Asset Management 13F analysis

Michael Burry, who runs Scion Asset Management, rose to fame during the financial crisis of 2007 and has been a highly followed investor ever since. He gained notoriety due to his shrewd (bearish) bets on mortgage-backed securities in the run-up to the financial crisis which made him and his investors hundreds of millions of dollars in profits.

Scion Asset Management's latest 13F disclosure form , which investment companies must submit to the SEC every quarter to disclose their investment holdings to the public, contained some interesting information regarding where Michael 'The Big Short' Burry sees value in the stock market right now. And, not surprisingly, he sees value just in that one area that many investors have been fleeing in March: the U.S. regional banking market.

According to Scion Asset Management's latest disclosure, Michael Burry bought shares in five U.S. regional banks, some of which have been the most heavily punished banks doing the recent crisis.

The investment firm purchased 850,000 shares of New York Community Bancorp ( NYCB ), 250,000 shares of PacWest Bancorp, 125,000 shares of Western Alliance Bancorporation, 184,900 shares of Huntington Bancshares and 150,000 shares of First Republic Bank. He also bought 125,000 shares of Wells Fargo ( WFC ).

In total, Michael Burry, invested $18.7M into U.S. regional banks. At the end of the quarter, those five holdings mentioned above had a total portfolio weight of 17.5% so Scion Asset Management's investment into regional banks is a rather significant investment for the fund. The biggest community bank position taken by Michael Burry is in New York Community Bancorp which reflects a portfolio weight of 7.19%. The second-largest position was made in Western Alliance Bancorporation which accounted for 4.15% of Scion Asset Management's portfolio value.

Smart money flows into U.S. regional banks

The smart money has been flowing into U.S. regional banks as investors such as Bill Gross also invested heavily into banks such as PacWest Bancorp while Citadel's Ken Griffin took a 5.3% stake in Western Alliance Bancorporation at the peak of the crisis in March. Obviously, professional investors invested in the U.S. regional bank sector just went retail investors left. Warren Buffett recently disclosed a near-$1.0B investment in Capital One Financial... a bank I also recommended in the wake of the financial crisis.

A case in point is Western Alliance Bancorporation which has been bought by numerous investors lately, including Michael Burry and Ken Griffin. Western Alliance has given investors numerous deposit and liquidity updates since the peak of the crisis... and each one showed broadly improving trends in the business. According to Western Alliances' latest update , the bank's deposits have grown $600M since the bank gave its previous update on May 2, 2023. Total deposits, as of May 9, 2023, totaled $49.4B, showing an increase of $1.8B since quarter-end. Western Alliance also reaffirmed its outlook that it will attract $2.0B in deposits in Q2'23 which is an outlook that now seems conservative. Western Alliance's deposit update indicates that the situation in the regional banking market has improved considerably since March. I have discussed the bank's improving deposit trends in my work " Western Alliance: Major Recovery Ahead ".

Michael Burry bought some of the most heavily punished regional banks

The five regional banks that Michael Burry bought during the first-quarter were severely punished by the market, in large part because of their perceived vulnerability related to their deposit bases. The banks purchased by Michael Burry have had high uninsured deposit percentages which made them especially vulnerable to deposit runs. The risk of a deposit has been greatly reduced ever since the Fed announced that it would backstop deposits.

First Republic Bank has since failed, but other U.S. regional banks purchased by Michael Burry have started to be priced at material discounts to book value… indicating that the market is pricing these U.S. regionals for failure. Scion Asset Management's largest portfolio position (by total amount invested and % of portfolio assets), New York Community Bancorp, is currently trading at a 28% discount to book value. Other banks purchased have book value discounts between 80% (PacWest) and 16% (Huntington).

Risks with U.S. regional banks

Regional banks have seen an enormous amount of value destruction since Silicon Valley Bank went out of business. I have made aggressive investments in the regional banking market as I see a lot of value in well-managed banks with sound balance sheets such as Western Alliance Bancorporation, U.S. Bancorp ( USB ) or Comerica ( CMA ). However, there is no guarantee that the financial crisis could not get worse. If more banks fail and new deposit runs on more vulnerable regional banks occur, the financial crisis could go into round two and cause more value destruction.

Final thoughts

Michael 'Big Short' Burry bought regional banks at a time when the market panicked and valuations plummeted... which might turn out to be yet another great lesson the investor is teaching the market. I am cautiously optimistic that the situation in the regional banking market is improving and this is largely due to the Fed's unprecedented actions in March which made emergency liquidity available to U.S. depositary institutions. But, more bank failures could happen and the fact that investors like Michael Burry are buying against the market trend is no guarantee that an investment will be successful. First Republic Bank, as an example, had to be saved by the FDIC and was sold at a bargain price to JPMorgan & Chase. Other banks may follow. However, Scion Asset Management's 13F disclosure is certainly yet another piece in the puzzle that tells regular investor where the smart money is flowing!

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