Dr. Michael Burry of 'The Big Short' Buys Only One Stock as He Further Cuts Portfolio

Investor who called the financial crisis keeps only three positions

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Dec 01, 2016
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Dr. Michael Burry, an investor best known for being portrayed in the movie “The Big Short,” but who became a legend for shorting the mortgage market in 2007, has continued his trend of making sweeping changes to and slimming down his portfolio each quarter at his reborn fund, Scion Asset Management.

In the recent third quarter, Burry sold out of four positions and made one new buy, leaving him with only three long equities. His new position, Coty Inc. (COTY, Financial), also became his largest, at 40.2% of the portfolio’s assets, followed in size by Alphabet Inc. (GOOG, Financial) and HCA Holdings Inc. (HCA, Financial). The value of the stocks had also dwindled to $32 million. Burry has not responded to request for comment on whether he has withdrawn from the market because he sees danger ahead or simply moved assets elsewhere.

Burry’s latest reported position, Coty, is a beauty products company that makes fragrances, cosmetics and skincare, and owns common drugstore brands such as Rimmel, Sally Hansen and OPI as well as upper-tier skincare brands such as Lancaster and Philosophy.

The beauty industry is dominated by giants L’Oreal (OTCPK:LRLCY, Financial) with a $95.1 billion market cap and Estee Lauder (EL, Financial) with a $27.5 billion market cap that dwarf $12.89 billion Coty.

Strong revenue per share growth followed Coty’s share price since its 2013 market debut. The stock soared as much as 85% from its IPO price of $17.50 by July 2015, when news that Coty would buy Procter & Gamble’s fragrance and cosmetics business bumped it significantly to around $32.50. The $12.5 billion transaction places Coty among the larger players in the beauty industry, with $10 billion in annual revenue.

Benefits to shareholders include a forecasted $550 million in annual cost savings over the three years following its completion, composed of $400 million in non-transferred costs and $150 million in cost synergies. Working capital improvement and future growth from its expanded portfolio of brands and geographic footprint were set to increase value, while management boosted its annual dividend to 50 cents from 27.5 cents.

First-quarter earnings reflected the great cost of joining the two companies, however, causing its stock to fall. By market close on Thursday, Coty was priced at $18.03 per share, near its IPO price for the first time since 2014, below its dip following its first-quarter results announcement in November, and below its average price for the third quarter, in which Burry bought, of $26.

The market reacted negatively to the company’s announcement that merging would present challenges before it provided profits. Among sour news in its release, net revenue fell 3% to $1.08 billion and earnings per share fell to 23 cents compared to 64 cents in the same quarter a year prior. Declines in both directly related to management spreading funds typically used to run the business to close the deal and set up the new company, changing management teams and moving around geographic locations.

The company also said it expected the declines to persist as long as the second quarter, but was indefinite about the proceeding timeline, with its chairman, Camillo Pane, saying it anticipated “a journey” to realize its ambitions, and “challenges as we integrate and rebuild the businesses.”

Coty has produced free cash flow each year since 2010, and has long-term debt of $4.2 billion, with $1.7 billion issued over the past three years. It also has cash of $378 billion at the end of the September quarter. Its P/E ratio is 43 and P/S is ratio is 1.59, near a two-year low.

Burry bought 550,000 shares of the company, a position worth $12.9 million.

He also sold four holdings: biopharmaceuticaul companies Amgen Inc. (AMGN, Financial) and Theravance Biopharma Inc. (TBPH, Financial), semiconductor company NeoPhotonics Corp. (NPTN, Financial) and real estate investment trust NexPoint Residential Trust Inc. (NXRT, Financial).

Burry has reported only four quarters of portfolio filings since opening his new private investment firm, Cupertino-based Scion Asset Management, the sequel to his previous hedge fund Scion Capital. He closed that fund in 2008 after shattering the market with 696.9% in returns to his clients from 2000 through 2009, versus the S&P 500 gain of 5.2%. His value-investing philosophy and cinematic foresight of markets enabled him to earn double-digit returns during the bursting of the dot-com bubble in the early 2000s and a 167% return in 2007 as the subprime mortgage market crash began to ripple through financial markets leading to the S&P 500’s worst year in history in 2008.

See Michael Burry’s portfolio here.