Hedge fund manager Michael Burry shot to stardom after predicting the collapse of the U.S. housing market back in 2007 -- and raking in $100 million for himself and more than $700 million for his investors thanks to his bet. And that's exactly why it's a great idea to take notice when Burry makes investing moves, especially ones that go against the crowd.
Burry, whose story was documented in the movie The Big Short, manages more than $578 million at Scion Asset Management, and recently revealed his latest moves as part of his 13F filing. These documents, submitted quarterly to the Securities and Exchange Commission, offer a glimpse into the strategies of managers of more than $100 million in securities.
In the second quarter, Burry made a striking move: He bought shares of a struggling healthcare giant -- ones that have plummeted nearly 50% over the past year. And Burry didn't only buy a few shares of this company. He's actually made it his biggest position through purchases of both the shares and call options -- the call option position holds an 18% weight in his portfolio. Does this daring investor know something that Wall Street doesn't?
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Burry's purchase of stock and call options
So, first, let's find out which stock Burry is most bullish on, according to his latest moves: UnitedHealth Group (UNH 1.13%). Burry bought 20,000 shares and call options on 350,000 more -- a call option is a contract allowing you to buy an asset in the future at a preset price. It's a bet on the asset's price rising -- the idea is the preset price will be lower than the stock's actual price, allowing you to buy at a level that's below market value.
Both the shares and call options are new positions in Burry's portfolio, which also has shown a shift to general bullishness: The investor, who had bearish options betting on declines in tech stocks such as Nvidia and Alibaba Group in the first quarter, no longer held those positions in the second quarter.
Now, let's consider the UnitedHealth bet. This company is the biggest U.S. health insurer, operating both UnitedHealthcare -- its insurance unit -- and Optum -- a unit that offers health services such as patient care, pharmacy benefits management, and more. This player clearly has a strong market position, and it's grown earnings over the years.
UNH Net Income (Annual) data by YCharts
But this year, UnitedHealth has faced serious challenges that have weighed on earnings and stock performance, from a U.S. Department of Justice probe into the company's Medicare business, to rising healthcare costs and greater-then-expected patient use of medical services. In the second quarter, UnitedHealth reported adjusted earnings per share of $4.08, missing analysts' estimates of $4.48, and the company expects pressure on earnings to continue through this year.
Why is Burry buying?
Considering all this, you may be wondering why Burry has been piling into shares of this struggling healthcare giant. Though this top investor hasn't revealed the reasons behind his moves, a look at UnitedHealth's market position and current situation offer us some clues -- and a reason why we, too, might offer this stock a second look.
As mentioned, the company is the leading U.S. health insurer, and on top of that, it also generates revenue through its Optum services business. UnitedHealth isn't likely to lose this position overnight, and it's important to note that rivals also face the reality of increasing healthcare costs and greater use of services -- so this isn't a UnitedHealth-specific problem.
NYSE: UNH
Key Data Points
At the same time, UnitedHealth is making moves to address current challenges. For example, the company is exiting plans where costs have become too difficult to manage, it's raising premiums on certain plans, and it's using artificial intelligence (AI) to drive efficiency -- in fact, AI is expected to help lower costs by $1 billion for Optum next year. In a filing this summer, UnitedHealth also said it is complying with all Justice Department requests concerning the probe.
A cheap stock
Finally, today, UnitedHealth, trading at 13x trailing-12-month earnings, is near its cheapest level in about a decade.
UNH PE Ratio data by YCharts
UnitedHealth's latest earnings reports may not look fantastic, but the company's leaders have identified the problems, set out concrete plans to address them, and even predict a return to earnings growth next year.
So, UnitedHealth might not have been a Wall Street favorite earlier this year, but Michael Burry is right to forget about that and focus on the future. From that perspective, UnitedHealth looks like a smart healthcare stock to buy now for a dirt cheap price and hold through the company's recovery and beyond.
