CI - Michael Burry's 13F: Nearly All-In On Market Crash After Months Of Radio Silence

2023-08-15 06:53:21 ET

Summary

• After laying low, recent 13-F filings show that Michael Burry has placed huge short bets on the S&P 500 and NASDAQ 100, with over $1.6 billion in notional value.
• Burry appears to be betting on a sharp decline in stocks happening soon, particularly high-flying tech stocks.
• As he did during the dot-com bubble, Burry also seems to see value in value stocks.
• Some of his smaller holdings include Expedia, Charter Communications, Generac, Cigna, CVS Health, MGM Resorts International, and Stellantis.

That was a classic Mike Burry trade," says one of his investors. "It goes up by 10 times, but first it goes down by half." This isn't the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. He couldn't do this if he was at the mercy of very short-term market moves, and so he didn't give his investors the ability to remove their money on short notice, as most hedge funds did.

- Michael Lewis, The Big Short .

Burry Bets Big On Market Crash

13-F filings for large asset managers came out late yesterday, and Michael Burry's are always among the most interesting. Burry had disappeared from public view since April, maintaining radio silence since. Now, new filings show that Burry has raised the stakes on his short bets, buying puts on the S&P 500 ( SPY ) and NASDAQ 100 ( QQQ ) with over $1.6 billion in notional value. With this, Michael Burry appears to be nearly all-in on bets that will profit from a sharp decline in stocks, particularly high-flying tech stocks.

Is Burry's trade genius, or is it insane? Burry has a long-time penchant for being early on trades, including his "sell" call early this year preceding his radio silence. Burry likely saw the steadily worsening leading economic indicators that many professional investors are seeing and assumed that investors would quickly agree. Instead, investors bought the dip en masse after several large banks failed this year, ignoring the slow-motion train wreck developing in business credit and real estate credit. His last notable tweet before going dark was that there was " no BTFD generation like you".

Now, it appears that Burry has placed a fresh bet on a huge market decline. That's not exactly an endorsement for a soft landing driven by dovish interest rates and the mammoth deficits of the current administration, nor an affirmation of 95th-percentile P/E valuations for the S&P 500. It's a gutsy call, but I think he'll be right in the end. Research shows that these types of late-cycle rallies after the Fed pauses and credit starts tightening tend to see about 13% rises for the S&P 500 on average, followed by 35% falls to the final lows. If history holds, Burry would stand to profit somewhere in the ballpark of $500 million from his short bets, depending on his strike price, premium paid, and expiration.

Of course, I'd be remiss if I didn't note that there are limitations to 13-F filings as they're delayed 45 days and don't include short positions (for example, if Burry bought put spreads then I believe only the long leg would show up). But we know from past filings that many of his holdings remain the same from quarter to quarter, so it's fairly likely that the 13-F reflects his actual positioning. And contrary to popular belief, Burry is not a one-trick pony from 2007-2008. He did very well as a value investor during the dot-com bubble and after in the 2010s as well. Burry is nearly all-in for "table stakes" here using options that limit his downside. His short bet isn't necessarily reckless, just very aggressive. It's likely he laid out somewhere between $10 million and $100 million on the bet, depending on the strike and expiration. Burry likely has hundreds of millions in personal wealth even if he loses this.

Burry's Other Value Investing Plays

Burry's 13-F also contains information on his most recent value investments. While they're much smaller in size than his massive short bet, they're still worth discussing.

Burry's other holdings:

1. Expedia ( EXPE ): Taking a quick look here, Expedia's price-to-earnings multiple is only 12x, and their financial statements look quite solid as well, with the exception of losing money in 2020. Analysts are expecting some margin expansion for the company, which would put the stock at roughly 9.5x 2024 earnings. This seems like a solid play from Burry. I don't think they'll hit these 2024 estimates with student loans kicking back in, but I could easily see EXPE having 50% or greater upside over the next three years. With cheap stocks like these, it's easy to get lucky.
2. Charter Communications ( CHTR ): Again, about 13x earnings, a big selloff from 2021, and maybe some value potential in the business. It's cheap enough that they don't have to grow earnings significantly for investors to earn a positive return. I don't have much of an opinion on this one.
3. Generac ( GNRC ): Generac makes generators for homes and businesses. GNRC is moderately valued at 21x P/E, my guess is that Burry sees big growth potential here due to the strain and problems with the American electric grid. This reminds me of another position where Burry previously invested heavily in private prisons and detention centers ( GEO ) before the migrant surges. He seems to have seen it coming before anyone else did. Scary stuff...
4. Cigna ( CI ): Cigna just trades for less than 12x earnings and is due for some slight earnings growth. I'm ballparking the likely return for CI stock at 15% annually from briefly looking at their valuation and financial statements.
5. CVS Health ( CVS ): This is another value stock that has come in and out of fashion. CVS is in deep value territory at 8.7x earnings, and analysts aren't projecting any growth at all. There is plenty of cash flow though, so if things do end up being better than expected the market might erase some of its massive discount to the large-cap universe. This seems like another reasonable bet.
6. MGM Resorts International ( MGM ): I don't really get this one. It's not nearly as cheap as the others at 18.9x earnings, and it's economically sensitive. It might be a China play, as they have a joint venture in Macao. China's economy is dramatically weaker than expected and destination gambling is not recession-proof. Burry's is a Wall Street legend and I'm a guy who writes on Seeking Alpha, but I don't see the value in this one. Also notable is that Burry seems to have jettisoned the rest of his Chinese stock holdings. This is a bit contradictory, and time will tell what Burry might be thinking. For now, he's not saying much publicly.
7. Stellantis ( STLA ): This is the parent company behind CDJR (Chrysler, Dodge, Jeep Ram), and a whole host of European brands such as Fiat, Citroen, and Maserati. This one makes sense- the company is dirt cheap. STLA has a 3.4x PE ratio and an 8% dividend yield. There are fears over the UAW after the union president symbolically tossed the automakers' offer in the trash, but we'll see what shakes out. For 3.4x earnings, I can see this being a play with solid upside.

Bottom Line

Michael Burry is the most interesting fund manager in the world, and recent filings show he's short $1.6 billion in notional S&P 500 and NASDAQ. That's a massive bet, and we'll see if it works out over the next 6-12 months. Burry is also long some select value stocks with surprisingly good financials. So will he be vindicated for his massive bet on a market crash? And will his value plays work out? Share your thoughts in the comments below!

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