In this article, we examined Big Short’s Michael Burry bets on 11 stocks amid his warning over the stock market collapse ahead.
Scion Asset Management chief Michael Burry, who is famous for his billion-dollar bet on the US housing crash in 2008, warned investors of the potential stock market crash ahead. The Big Short claims that the speculative market environment and trader’s strategy of using borrowed money for betting on stocks have pushed the market into a dangerous spot. “The market is dancing on a knife’s edge,” Burry said in a tweet. Burry says Wall Street has previously ignored his warnings on the housing bubble and no one is listening now. “People say I didn’t warn last time,” he said. “I did, but no one listened. So I warn this time. And still, no one listens. But I will have proof I warned.”
Before moving on to Michael Burry’s top 11 stocks for 2021, let’s briefly review Big Short’s overall portfolio adjustments in the fourth quarter.
Although Scion Asset Management missed GameStop’s (NYSE: GME) Reddit-related bull-run in 2021, Big Short still earned $270 million from its video gaming retailer bet. The hedge fund has sold out the entire GameStop stake during the fourth quarter.
Michael Burry of Scion Asset Management
Scion Asset Management founder remained active throughout the fourth quarter. The firm’s 13F filings revealed that Scion has sold out of its Alphabet (NASDAQ: GOOG) call option position during the fourth quarter. The parent company of Google had represented 17.8% of Scion’s overall portfolio at the end of the third quarter of 2020. A call option contract means the buyer is bullish about the future prospects of stock performance. Burry’s hedge fund has also closed a call option position in CVS Health Corporation (NYSE: CVS) during the fourth quarter. Overall, the firm sold out 21 stocks and reduced its positions in 9 stocks, according to the fourth quarter filing.
In addition, Burry has diversified its portfolio to beat the market volatility. The top 10 positions represented 65% of the 13F portfolio at the end of the fourth quarter. Previously, the firm’s portfolio concentration was only focused on few stocks. The real estate sector remained Michael Burry’s most favorite area of investment for 2021. The famous value investor is also seeking to capitalize on potential gains from the energy sector, which accounted for 14% of the portfolio at the end of Q4 compared to just over 1% of the portfolio weighting in the previous quarter.
It also appears that Burry’s strategy of expanding its investment towards the energy sector worked in favor of Scion Asset Management because the S&P 500 energy sector, which posted big losses in 2020, is leading the broader market index so far in 2021. He added three new energy stocks into the portfolio including Now Inc (NYSE: DNOW), SunCoke Energy (NYSE: SXC), and Hollyfrontier (NYSE: HFC) during the fourth quarter. Fortunately, all three stocks are up almost 50% since the beginning of this year.
While Michael Burry’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start reviewing how Michael Burry is seeking to make profits from stock markets, which in his view on the brink of collapse. For that, we decided to examine Scion Asset Management’s top 11 stocks picks that represent close to 70% of their 13F portfolio. Big Short’s Michael Burry Is Betting On These 11 Stocks:
11. Wells Fargo & Company (NYSE: WFC)
Big Short Michael Burry’s strategy of buying Wells Fargo & Company during the fourth quarter appears to be working. This is because shares of a diversified financial services company rallied 24% since the beginning of this year, up significantly from S&P 500 growth of around 4%. Scion Asset Management bought 250,000 shares of WFC in Q4 valued at $7.5 million.
Argosy Investors, which posted a 29.8% return for 2020, highlighted few stocks including Wells Fargo in a Q4 investor’s letter. Here’s what Argosy Investors stated:
“I believe that there is nothing fundamentally wrong with Wells Fargo’s business that cannot be fixed, and once they can return to normal operations without the fake account nonsense then I expect they will return to earning returns slightly lower than historical norms. If Wells Fargo uses 100% of its earnings to repurchase shares over the next 3 years, Wells can retire 25% of its outstanding stock. By 2023, WFC could earn $6+ per share. At 10x earnings, a very low multiple given the rest of the stock market trades at 22x earnings, Wells Fargo could fetch $60 per share. WFC’s current share price is $33 and our cost basis is around $25 per share. If it takes 5 years for Wells to get out of the penalty box and trade at $60 per share, we can earn a 20% annual return on our investment, including dividends.”
10. Qurate Retail, Inc. (NASDAQ: QRTEA)
Although the hedge fund has slashed its 36% stake in Qurate Retail, Inc. (NASDAQ: QRTEA) during the fourth quarter, the online retailer is among the 11 top stocks Big Short’s Michael Burry is betting on in 2021. The firm has benefited from its bet on Qurate Retail as shares of the online retailer rallied 10% year to date.
Weitz Investment Management, a boutique employee-owned firm, stated in the Q4 investor’s letter that Qurate Retail is trading at discount. Here’s what Weitz Investment Management said:
“The strongest quarterly performance came from Qurate Retail, a more modestly sized holding. Qurate’s home shopping offerings across pay-TV, dot-com and other digital channels were well suited for the current environment, driving a return to sales growth in the second quarter (the first in more than a year). Management also took steps to highlight the company’s resilient cash flow generation, paying a $1.50 cash dividend and distributing new 8% cumulative preferred securities to owners as part of a broader capital structure shuffle. We were encouraged by these announcements and bought additional shares of the common equity, which also allowed us to receive additional preferred shares. As trading in the preferred began, technical pressures led the shares to trade at a significant discount to par, giving us another opportunity to further build our position at attractive prices. In the days that followed, the pressure eased, and shares recovered to trade at a modest discount to par value.”
9. The Allstate Corporation (NYSE: ALL)
Scion Asset Management’s strategy of buying The Allstate Corporation (NYSE: ALL) shares during the third quarter and holding them for 2021 has also been moving in the right direction. This is because shares of Allstate grew 16% in the last six months. In addition, the firm also returned hefty cash to shareholders in the form of dividends. The company currently offers a dividend yield in the range of 3%.
Generation PMCA, an investment management firm, has explained in a second-quarter investor’s letter why Allstate Corporation is a good stock to buy. Here is what Generation PMCA stated:
“Allstate, the second-largest personal auto and home insurance writer in the U.S., should see earnings expand this year, during a challenging period when most companies aren’t expected to deliver year-over-year earnings growth. Higher mortality rates from coronavirus are being offset by lower mortality outside of virus-related deaths and expense control. In auto, the benefits of lower miles driven due to the pandemic offset auto rebates. Historically, Allstate’s scale and conservative underwriting have translated to superior profitability metrics. The company is on pace to achieve a mid-teen return on equity for ’21, well above peers. However, with shares currently at 1.3x book value, Allstate trades at a discount to competitors. We believe skepticism around recent acquisitions to diversify away from life and auto insurance (e.g., identify theft and warranties) is the reason for its discounted valuation. We expect the company to continue to cast its net further afield given the long-term threat of autonomous vehicles to its automobile franchise. We are comfortable with the strategy, especially since these acquisitions are immaterial. Meanwhile, the company should continue to post peer-beating results. Our FMV estimate is $120.”
8. Western Digital Corporation (NASDAQ: WDC)
Big Short’s Michael Burry is betting on Western Digital Corporation (NASDAQ: WDC) in 2021 and it appears that the bet has worked in favor of his hedge fund. Shares of Western Digital are up 22% so far in 2021, extending the six-month gains to 60%. The firm has initiated a position in WDC during the third quarter of 2020 and reduced its stake by 40% in Q4 to 3.70% of the overall 13F portfolio. WDC share price rally is backed by improving demand for DRAM.
7. Uniti Group Inc. (NASDAQ: UNIT)
Michael Burry’s hedge fund has been holding a position in Uniti Group Inc. (NASDAQ: UNIT) since the second quarter of 2020. It is the seventh-largest stock holding of Scion Asset Management, according to the latest filings. Shares of Uniti underperformed so far in 2021 compared to the S&P 500 index but the stock price gains of 18% in the last six months topped the broader market index.
Uniti is an internally managed real estate investment trust. It is engaged in the acquisition and construction of mission-critical communications infrastructure, and also offers wireless infrastructure solutions for the communications industry.
6. RPT Realty (NYSE: RPT)
Big Short Michael Burry’s bet on RPT Realty (NYSE: RPT) also doesn’t go the wrong way because shares of RPT Realty rallied 27% year to date, enlarging six months gains to almost 80%. Scion Asset Management has initiated a position in RPT during the third quarter and reduced its stake by 25% during the fourth quarter. Despite that, RPT accounts for 3.85% of the overall portfolio, according to the latest filings. RPT Realty owns and operates a national portfolio of open-air shopping destinations principally located in top U.S. markets.
5. NOW Inc. (NYSE: DNOW)
Big Short’s Michael Burry is betting big on energy stocks in 2021. He initiated a position in downstream energy product provider NOW Inc. during the fourth quarter by purchasing shares worth more than $10.77 million. It is the fifth-largest stock holding of Scion Asset Management, representing 4.79% of the overall portfolio. Shares of NOW soared close to 50% since the beginning of this year, thanks to improving commodity prices.
Palm Valley Capital, an investment firm, highlighted a few stocks including NOW Inc in a Q3 investors letter. Here is what Palm Valley Capital stated:
“NOW is a 2014 spinoff from National Oilwell Varco and has a 150-year legacy as a distributor to the oil and gas and industrial markets. Through a vast network of 245 locations, NOW’s 300,000 SKU product offering addresses all segments of the energy value chain, from upstream E&Ps to midstream infrastructure to downstream refining, in addition to industrial end markets including chemicals, mining, utilities, and manufacturing. When energy companies reduce activity, NOW suffers. However, it has streamlined its business since the last oil and gas downturn and expects reduced operating losses this round. As of June 30th, NOW had $269 million of cash and no debt ($497 million market cap), although if demand recovers as we expect, some cash will be reinvested in working capital. The stock is currently selling for 66% of tangible book value.”
4. Lumen Technologies, Inc. (NYSE: LUMN)
Big Short’s Michael Burry is bullish on the fundamentals of Lumen Technologies, Inc. (NYSE: LUMN). He has increased his stake in Lumen by 43% in the fourth quarter, making it the fourth-largest stock holding of the 13F portfolio. Burry’s stock-picking strategy also worked in the case of Lumen Technologies as shares of the facilities-based communications company grew 24% since the beginning of this year. Moreover, the company offers more than an 8% dividend yield to shareholders. Here is what Longleaf Partners said about Lumen in its 2020 Q4 investor letter:
“Lumen (-19%, -2.71%; -1%, -0.12%), the fiber telecom company formerly named CenturyLink, was a top detractor for the year and the only (slight) detractor in the fourth quarter. During the last quarter, Enterprise fiber revenues grew 0.8% year-overyear, International and Global declined 2.6% and Small and Medium Business (SMB) shrunk 5.8% due to COVID repercussions. Yet margins slightly increased due to the strong cost controls of CEO Jeff Storey and CFO Neel Dev. Despite significant deleveraging over the last two years and multiple debt issuances this year at low to mid-single digit interest rates, the stock trades at an incredibly low multiple of <5x FCF. We believe Lumen can grow by continuing to invest into fiber, which should outweigh its declining legacy copper landline business. Numerous recent large transactions for fiber peers at double-digit EBITDA multiples and landline peers at mid-single digit EBITDA multiples also suggest that Lumen could monetize several of its segments at good prices well beyond its total market capitalization today. We have stepped up our engagement with the company and signed a non-disclosure agreement (NDA) last month, so unfortunately we cannot say more other than “stay tuned.”
3. The Kraft Heinz Company (NASDAQ: KHC)
Scion Asset Management has initiated a call option position in The Kraft Heinz Company (NASDAQ: KHC) during the fourth quarter. KHC share price has extended the upside momentum into 2021 amid strong financial numbers. The company has generated December quarter revenue of around $6.94B, up 6.1% from the year-ago period, with expectations for similar growth in the upcoming quarters.
The market analysts anticipate more upside for KHC stock despite the recent gains. JPMorgan analyst Ken Goldman said: “We still see some upside – our price target is $41 and KHC has a 4.2% annual dividend yield – but not enough to necessarily warrant an Overweight rating. We had not anticipated the KHC shares working this well this fast, but now that they have, we want to respect valuation and the potential limits to the upside, as we see them.”
2. Pfizer Inc. (NYSE: PFE)
The hedge fund has invested $31 million in Pfizer Inc. (NYSE: PFE) call position, according to the latest filings. It is the second-largest stock position of Scion Asset Management, accounting for 13.83% of the overall portfolio. However, shares of Pfizer fell sharply since the beginning of this year, losing all the gains it had generated on coronavirus vaccine discovery. The company has generated 11.8% year-over-year revenue growth in the latest quarter.
The New York-based drug maker announced mixed financial results for the fourth quarter. It reported earnings of $594 million, or 10 cents per share for the quarter, as compared to a loss of $337 million, or 6 cents per share in the comparable period of 2019. On an adjusted basis, profit rose to 42 cents per share but missed the consensus forecast of 50 cents per share.
Revenue jumped 12 percent on a year-over-year basis to $11.68 billion, beating the analysts’ average estimate of $11.48 billion. If we look at the sales performance of different segments, oncology vaccines revenue jumped 17 percent, while rare disease vaccines revenue climbed 26 percent in the quarter. Moreover, revenue from internal medicine and hospital segments rose 1 percent and 8 percent, respectively.
Pfizer raised its earnings outlook for 2021. It now expects to report earnings in the range of $3.10 per share to $3.20 per share for the current fiscal year, as compared to its previous guidance between $3.00 per share to $3.10 per share. Moreover, revenue is expected to come between $59.4 billion to $61.4 billion, as compared to the consensus forecast of $58.3 billion.
The improved outlook came as the company expects to generate $15 billion in revenue from its COVID-19 vaccine. Pfizer plans to make 2 billion doses of the vaccine this year.
1. Citigroup Inc. (NYSE: C)
Big Short’s Michael Burry is also betting big on Citigroup Inc. (NYSE: C) in 2021. His firm has initiated a big call option position in the banking giant during the fourth quarter, accounting for 14.81% of the overall portfolio. Shares of Citigroup soared close to 9% since the beginning of this year, enlarging six months’ gains to 30%.
Oakmark Select Fund, an investment advisory firm, highlighted few stocks including Citigroup in the Q3 investor’s letter. Here is what Oakmark Select Fund stated:
“Citigroup was our largest detractor for the period due to Covid-19-related concerns that have hurt the entire financial sector, as well as a handful of Citigroup-specific headlines that amplified near-term uncertainty. We believe that investors’ short-term focus can cause them to miss the bigger picture. The company has remained profitable throughout the Covid-19 crisis to date. It continues to operate with significant excess capital relative to regulatory minimums, even as it has added more than $10.5B to credit reserves year to date. We believe the company is proving its resilience during a real-life stress test. Yet, despite this positive early evidence, Citigroup currently trades at only 60% of tangible book value and slightly over 5x 2019 earnings per share. Given that we think the company’s normalized earnings power is greater than what it achieved in 2019, we find these valuation metrics especially attractive. As we move beyond the pandemic, we think investors’ focus will shift to the underlying quality of the business and they will value the resilience Citigroup demonstrated during this crisis.”
Please also see 11 Best Lithium Stocks To Buy Now and Ray Dalio’s Top 10 Stock Picks for 2021.
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