The man who made a billion-dollar bet on the housing market by correctly calling its collapse during the run-up to the 2008 financial crisis seems to be making a new prediction: The stock market is about to crash.
Michael Burry, who was one of the main figures in the book The Big Short and its subsequent movie adaptation of the same name, recently sold every single stock his Scion Asset Management hedge fund owns and added just one -- private prison operator GEO Group (GEO 2.32%).
Image source: Getty Images.
Although he has not commented on why he made the move, a cryptic, since-deleted tweet from May read, "As I said about 2008, it is like watching a plane crash. It hurts, it is not fun, and I'm not smiling."
At the time, the markets seemed to be in free fall with the S&P 500 posting seven consecutive weeks of losses, and the first six months of 2022 would go on to be the worst start to a year in over 50 years.
It all raises a number of questions investors should ask: Will lightning strike twice for Burry? Should investors follow his lead? And what's up with his buying GEO Group?
Clouds on the horizon
Burry is not alone in thinking the stock market is due for a crash. Noted investor Jeremy Grantham -- who reportedly called the Japanese market crash in 1989, the dot-com bubble in 2000, and the housing market top in 2008 -- also thinks stocks are primed for a major devaluation, calling rising asset values a "superbubble."
Both he and Burry may be right, of course, but Grantham has been expecting stocks to "crack" since 2011 on the belief the Federal Reserve was creating the bubble. Over the ensuing decade, stocks nearly quadrupled in value, turning a $10,000 investment in the S&P 500 in into one worth almost $38,000.
That doesn't mean they are both wrong now, but it's important to keep in context from whom this message is coming.
Throwing out the baby with the bathwater
Panicking and withdrawing all the money in your portfolio to put it under your mattress seems a bit extreme, even if a crash were to come. While caution may be warranted, downturns are often excellent times to add to your holdings because you pick up previously expensive stocks at a discount.
History shows bull markets follow bear markets and where a bear market lasts less than 10 months on average, bull markets tend to go on for more than four years. That's backed up by data from the Schwab Center for Financial Research that found since 1974 the S&P 500 has risen by more than 24% one year after a market correction bottom, on average.
Burry's Scion had a portfolio of excellent stocks, including Apple, Alphabet, Bristol-Myers Squibb, and Meta Platforms. He sold off a dozen positions and purchased just the one, GEO Group.
That's an even more extreme bet than Warren Buffett's: He owns billions of dollars worth of stock in dozens of companies, but has almost half of Berkshire Hathaway's portfolio tied up in Apple stock.
As I wouldn't even recommend anyone following the lead like that of someone considered the greatest investor in our lifetime, it follows I don't think going to the roulette wheel and placing all your money on red -- the equivalent of just buying the private prison operator -- is a good choice, either.
NYSE: GEO
Key Data Points
Locking up an opportunity
While Burry didn't place all of Scion Asset Management's money into GEO Group (his equity positions went from $164 million at the end of the first quarter to $3.3 million at the end of June), it's a singular notion that this is the company he expects to win.
Geo is a global operator, but 90% of its revenue comes from the U.S. Its stock got a big boost from Burry's bet, but there is concern about whether it can keep growing, as one of the first acts President Biden took upon entering the White House was to sign an executive order directing the Justice Department to not renew its contracts with private prison operators like Geo and rival CoreCivic.
While many of Geo's contracts are with Immigration and Customs Enforcement, which falls under the Department of Homeland Security and is not subject to the executive order, it has three contracts expiring within the next year that would fall under this restriction. Those contracts represent 6% of its revenue.
The real concern with private prison operators is the lack of access to capital as virtually every major bank has cut off the flow of money to Geo Group and CoreCivic. JPMorgan, Bank of America, Wells Fargo, and most other known big lenders to the prison companies have ceased doing business with them.
Geo says six of the 65 banks in its lending syndicate will not renew their lending commitments when they expire, but those six banks account for 54% of its senior lending commitments. As a result, Geo was forced to sell assets to pay for outstanding debt maturities coming due over the next few years, but now believes it will be able to pay what's left through available liquidity, the free cash flow it generates, and selling off other non-core assets in the future.
The prison operator also suspended its dividend during the early stages of the pandemic, and last year it terminated its status as a real estate investment trust.
Its shares have an elevated short interest with about 16% of those outstanding being sold short. Shares enjoyed a big run-up last year as Reddit traders piled into the stock, sending it to a high of about $9.50 a stub. Even after the surge following Burry's buy, Geo's stock remains 16% below that peak.
Go your own way
Following what successful investors are buying isn't a bad strategy as long as you don't try to blindly copy them.
Even though Scion Asset Management's 13F filing with the Securities and Exchange Commission was published just this month, it's only a snapshot of what Burry's position was at the end of June. Remember, he was pessimistic about the direction of the market at the time, and since then the S&P 500 has rallied by more than 20%. It's also notable the filing is not required to disclose positions in foreign companies or stocks that he's sold short.
While there's nothing to suggest he's changed his mind, there's also no proof he's changed his mind. Burry's moves are certainly worthy of starting a discussion, and caution about the state of the economy is always worthwhile, but his investing style is not necessarily one worth mimicking.
