It is not unreasonable to say that Dr. Michael J. Burry is a legendary value investor. He was relatively unheard of before the financial crisis but made hundreds of millions of dollars for himself and his investors of Scion Capital during the crisis by betting against subprime mortgages.
The subprime debt wasn't his original specialty. Burry started Scion as a pure value hedge fund, and his returns in the first few years of managing the funds were second to none.
According to the author Michael Lewis, who wrote the book "The Big Short," which was later made into a film, in Scion's first year, the hedge fund returned 55%, against the decline of 11.9% for the S&P 500. In Burry's second year, the S&P 500 declined 22.1%. Scion gained 16%. The next year, 2003, the stock market turned around and rose 28.7%. Burry beat it again. His investments rose by 50%. By the end of 2004, Burry's assets under management had grown from virtually zero to around $600 million, and he was turning money away.
In April 2008, Burry liquidated his credit default swap short positions and closed his hedge fund after a turbulent few years.
Scion ultimately recorded returns of 489.4% (net of fees and expenses) between its Nov. 1, 2000, inception and June 2008, but the strain of running a hedge fund and having to answer to his investors proved too much for Burry. So, he decided to shut up shop and manage his own money for several years.
Making a comeback
After nearly a decade of flying below the radar, recently Scion has made a comeback. The hedge fund has started to file 13Fs (the document any hedge fund with more than $100 million in assets under management has to register with the Securities and Exchange Commission once a quarter detailing its U.S. equity holdings) again.
The latest document, for the fourth quarter of 2018, shows that Burry is back in business, and finding plenty of undervalued companies in the current market environment.
Undervalued stocks
According to the filing, the largest holding in Burry's portfolio today is Corepoint Lodging Inc (CPLG, Financial). The 13F tells us that at the end of 2018, Scion owned 900,000 shares in this business, worth just over $11 million.
According to the company's own description, Corepoint owns midscale and upper-midscale lodging, comprising 316 hotels and more than 40,000 rooms across 41 states. The stock has fallen by more than 50% over the past 12 months, and the business is not profitable. However, it is cheap. According to data, it trades at a price to tangible book ratio of 0.55 right now. It has a market capitalization of $806 million and an enterprise value of $1.8 billion, with an enterprise value-Ebitda ratio of 8.8.
The second and third largest holdings in Scion's portfolio, both worth around $9.2 million, are Alexander & Baldwin (ALEX, Financial) and Five Point Holdings (FPH, Financial).
Alexander & Baldwin is another real estate-focused company. The business owns, operates and manages 3.4 million square feet of primarily retail and industrial space in Hawaii. The stock is currently trading at a price-book ratio of 1.3, but it has rallied substantially over the past few weeks. The stock is up around 39% since the end of 2018, which seems to suggest that Burry bought at a much lower price, possibly below book value.
Five Point is the owner and developer of mixed-use, planned communities in coastal California.
Moving down the list of companies that feature in Scion's portfolio we have Walt Disney (DIS, Financial), Facebook (FB, Financial) and Cleveland Cliffs (CLF, Financial). At the end of 2018, all three of these positions were worth around $8.5 million each.
Cleveland is a supplier of iron ore pellets to the North American Steel industry and was formerly called Cliffs Natural Resources. The company has undergone a significant restructuring over the past five years and currently looks quite cheap. It is trading at a forward price-earnings ratio of just 6.3.
Disclosure: The author owns no share mentioned.
