THE 5 STOCKS THAT MICHAEL BURRY (OF ‘THE BIG SHORT’ FAME) BOUGHT RECENTLY
​
15th June 2020
​
Michael Burry came to prominence shortly after the 2008/2009 crash, when it emerged that he was one of the very few to predict the catastrophic near-collapse of the financial system. Burry discovered that investments called ‘Collateralized Debts Obligations’ or ‘CDOs’, which had become very popular, were getting low risk ratings from the main credit rating agencies, Standard & Poors and Moodys, that were unjustified.
​
Collateralized Debt Obligations (CDO), also called Collateralized Loan Obligations or Collateralized Mortgage Obligations, are created when a bank sells a package of its loans. The buyer of the CDO then receives the interest and capital repayments instead of the bank. However, as the bank had sold on these loans, it could then lend out the money again to new clients without breaching its capital adequacy requirements.
​
The majority of these CDOs got low risk ratings from the credit rating agencies, but Burry did not rely on this. Instead he took the time and the trouble to investigate the actual make up of these CDOs and he found that many of the underlying borrowers were under pressure and likely to default.
​
How did the investment banks that brokered many of these CDO deals between the sellers (the retail banks) and the buyers (investment institutions), manage to deceive the credit rating agencies into believing that these investments were low risk? The jury is still out on that one, but one technique was to include some loans of poor quality in an overall package that mostly consisted of good quality loans. Of course, as more and more of these deals were being done, the low quality content invariably increased. Also some commentators argue that there was a conflict of interest, as the investment banks and the retail banks, collectively pay the credit rating agencies to rate these investment instruments.
Anyway, this was one of the key factors that threw more oil on the fire back in 2008/2009, but Burry saw it coming and profited by shorting these investments. His exploits (together with the exploits of a handful of other investors who predicted the extent of the financial crash) are described in Michael Lewis’s book ‘The Big Short’ which has also been made into a movie.
​
Michael Burry manages a hedge fund called Scion Asset Management. If one presumes that he remains as diligent and independently minded now as he was pre 2008/2009, then any stocks he invests in could be worth checking out. Recent SEC filings have revealed that he made significant new investments at end of May 2020 in the following five stocks:-
1. THE MICHAELS COMPANIES (MIK)
The Michaels Companies, Inc, owns and operates arts and crafts retail stores for hobbyist and do-it-yourself home decorators in the US and Canada. It recently announced a deal with UPS whereby customers could pick up their order at the nearest UPS depot.
​
Burry bought his stake at an average cost of $1.62 per share. However, the stock has since run away from us and closed at $5.61 today.
​
2. DISCOVERY (DISCA)
​
Discovery, Inc, owns the television networks, the Discovery Channel and Animal Planet. It has a very strong balance sheet and its productions are low cost compared to the high cost frequently incurred by Netflix. The main actors in a wildlife documentary will be happy with a few nuts and berries, compared to the extortionate cost of employing Hollywood’s finest! In addition, Discovery has plenty of unused material to see it through the current lockdown period.
Burry bought in at an average cost of $19.44 per share. The stock closed at $22.75 today, having run up as high as $26.16 on June 8th, so that looks like a reasonable entry level.
​
Dicovery voting shares trade under the symbol DISCA. The non-voting shares trade under the symbol DISCK.
3. BOEING (BA)
It has been a case of one problem after another for Boeing in the past few months. First, its new 737 MAX has been grounded following two crashes. Second, the Covid 19 lockdown has brought everything to a standstill in the airline industry.
However, Boeing succeeded in raising a whopping $25 billion in a recent bond issue, and these funds significantly boost its balance sheet. This should allow Boeing to ride out its current problems, and Trump is unlikely to leave the company go under in election year.
Burry bought is at an average price of $149 per share. The stock subsequently shot up to $231 on June 8th, but has since fallen back to $190.94. Worth considering on any further weakness.
4. FACEBOOK (FB)
​
Facebook has a very strong balance sheet. It also has new services such as Facebook Shops, which will compete with Amazon’s Marketplace offering, and this could transform earnings. Facebook also announced some changes to its newly created crypto-currency LIBRA, and this has lead to speculation that it will enter the banking sector.
Burry bought in at an average price of $167 per share. The stock subsequently rose to $239 on June 9th before dropping back to close at $232.50 today.
​
I have been very keen on Facebook, ever since I highlighted it as being the best of the FAANGs in my Market Topics article of 21st May. The shares were then trading at $229.97, close to today’s level, so plenty of further upward potential in my opinion.
​
5. JACK IN THE BOX (JACK)
​
Look like it’s too late to buy this one – Burry was in at $35 and it closed today at $73. Jack In The Box operates and franchises fast food restaurants, mostly in the western part of the US. Again, in common with most of the above stocks, it has a very strong balance sheet. It has adapted well to the lockdown by partnering with delivery services such as Doordash and Uber Eats. Even at $73, the P/E is not unrealistic for a cash rich company at 33 times. However, better to wait for weakness in the stock and more evidence of what Burry finds attractive, before you dive in here.
​
Interesting to note that they don’t call them fast food restaurants in the States….they call them ‘quick service’ restaurants!
My source of information for most of the above is the You Tube broadcasts by Tom Heavey, a markets commentator based in the UK. Subscribe to his channel for further free updates on this topic.