Michael Burry developed quite a reputation in the investing world after being one of the few investors to essentially short the housing market. Despite pushback from his own investors at the time, Burry purchased credit default swaps on mortgage bonds and ended up making $800 million for himself and his investors.
Today, Burry still regularly invests through his fund Scion Asset Management, although he's pretty choosy. At the end of 2022, Scion only held nine stocks, and 56% of his portfolio was invested in just three stocks. Let's take a look.
Geo Group: 25% of the portfolio
With a market cap of around $1.2 billion, the government service provider Geo Group (GEO 0.87%) isn't exactly the stock one might think would make up a quarter of Scion's portfolio. But it looks like Burry has done OK on it, with Scion purchasing the bulk of its shares when the stock traded around $6.30 and $7.38. Scion sold about 47% of its position in the fourth quarter for an estimated average cost of $9.70, and the stock currently trades around $9.50.
Geo is a company that invests in private jails and mental health practices in North America, Australia, South Africa, and the U.K. The company does everything from financing to designing and constructing the centers to actually providing all of the resources needed to operate one of these facilities.
In 2022, Geo reported a profit of $172 million on total revenue of $2.38 billion. However, the company is only guiding for $127 million of profit and $2.47 billion of revenue at the top end of its range. The stock is down about 11% this year after a strong start for the broader market. Perhaps Burry sensed this coming, which is why he sold off a large part of Scion's position in Geo toward the end of last year.
But this is also a company that has struggled on more of a long-term basis, with the stock down more than 57% over the last five years. Geo, which is contracted by the U.S. Immigration and Customs Enforcement (ICE) to run detention facilities, is facing potential legal action after a person died while staying at one of Geo's facilities in Aurora.
Furthermore, many large U.S. banks have said they are going to stop financing private prisons due to some of the concerning reports about conditions in these facilities, so Geo looks like a fairly risky stock right now.
Black Knight: 19.9% of the portfolio
In the fourth quarter of 2022, Scion took a new position in the mortgage software and data company Black Knight (BKI), and the stake already makes up close to 20% of Scion's portfolio.
Black Knight provides a lot of different software solutions for mortgage servicing, mortgage origination, capital markets, and real estate. The company also provides a ton of data and insights used by companies across the mortgage industry to better run their businesses and generate new business. In May 2022, Intercontinental Exchange (ICE -0.14%) announced that it planned to acquire Black Knight in a part cash, part stock deal valued at $13.1 billion, or $85 per share.
With Black Knight's stock currently trading below $64 per share, this could be an interesting arbitrage opportunity. The big gap between the share price and the buyout offer suggests investors are concerned about the deal getting approved. Black Knight is trying to divest its loan origination software business to appease regulators, but there still appear to be antitrust concerns from the Federal Trade Commission.
Still, even if the deal doesn't go through, Black Knight is a solid stock on its own. It serves some of the largest mortgage companies in the U.S., and clients continue to expand their usage of Black Knight's products. Furthermore, Black Knight estimates that it can take a lender a year or 18 months to switch software and data providers, giving the company a nice moat in the industry.
Coherent: 11.3% of the portfolio
Another new position for Scion in the fourth quarter was the company Coherent (COHR 0.71%), which creates lasers and laser-related technology for customers in North America, China, Europe, Korea, and Japan.
The lasers and related technology that Coherent develops can be used in a variety of different industries, including wireless communication, laser cutting, three-dimensional applications, aerospace and defense applications, and much more. Coherent has three reporting divisions: networking for its photonic solutions products, materials for various compound semiconductors the company makes, and lasers. Networking consisted of 46% of total revenue in its fiscal year 2022.
Coherent makes complex technology, to be sure, and it's the kind of technology that is only going to see more demand moving forward. The company's various products are used for pretty much every big innovation you can think of, including medical devices, cloud infrastructure, virtual reality, and green energy solutions. Coherent is currently investing $500 million annually in research and development.
I like this play because instead of investing directly in the gold rush, in this case the technology that is going to be used for decades and maybe even centuries to come, Burry is buying the picks and shovels -- the manufacturers of the materials that power that gold rush.
