Guru Michael Burry will forever be famous for his role in "The Big Short," where he's depicted by Christian Bale. He's no longer managing outside capital, but Scion Capital's 13-F filings are interesting to follow.
This quarter, Burry bought 80,000 call options in Alphabet (GOOG, Financial) (GOOGL, Financial), which puts the notional value of that position at 35% of the portfolio. In addition, Burry bought Trip.com (TCOM) and Bed Bath & Beyond (BBBY, Financial).
Alphabet
Alphabet is known for its search engine and the related advertising business. It owns some other subsidiaries like Youtube and Android. However, the large majority of revenue is derived from its advertising business.
It is remarkable for Burry to buy into Alphabet this aggressively. A call position of this magnitude is almost unheard of. In my career, I've never seen it before. 13-F's do not reveal short positions, but it is possible that this is hedged by a short position, though to my knowledge that's not a common tactic for Burry to employ.
My impression is that he's extremely confident Alphabet will go up and potentially appreciate a large amount, which is when calls become much more favorable compared to a straight equity position.
The downside of calls is that they are very sensitive to the underlying stock depreciating. The losses will quickly be much greater than through a direct equity investment. Options also have other attributes which complicate things when they show negative or positive returns.
In some cases, options can also be preferred over equity if the investor expects volatility to rise. If the price doesn't appreciate over a certain time frame but the volatility of the underlying security does increase, that can result in the value of options increasing anyway.
If options are out-of-the-money, they lose time value over time. They are complex instruments, but the bottom line is this appears to be a huge testament of bullishness.
Alphabet trades at a market cap of just over a trillion dollars and a price-earnings ratio of 34.65. Earnings are somewhat below a "normalized" figure because of the pandemic, according to the company's earnings results. The company also trades at 19.37 times free cash flow.
Trip.com
Trip.com is a Chinese online travel company. The company is reportedly talking to investors about delisting from the Nasdaq, sources with knowledge of the matter told Reuters in July. The company may potentially plan on selling itself to a strategic investor, a PE firm or in a take private.
It also appears to be a type of "normalization" trade, in my opinion. Trip.com is still down 16% year-to-date and as a travel related stock may benefit if the environment moves towards normalization and away from the pandemic crisis.
Pre-pandemic, the company had been growing revenue at about 10% per year. That's after a period where revenues were growing 30%-40% per year. Over the last couple of years the company shifted its focus from revenue growth to earnings-per-share.
The company trades at a $16 billion dollar market cap, an EV/Ebitda ratio of 36 and a price to cash flow multiple of 15.64.
Bed Bath & Beyond
Bed Bath & Beyond is a household name in the U.S. The company operates a chain of retail stores focused on domestic merchandise such as bed linens, bath items, home furnishings and basic housewares. The company operates approximately 1,500 stores. In a recent update, the company reported an increase in digital sales of 70% that offset a 15% decline in in-store sales. In the aggregate, the company saw 2% growth in the second quarter of 2020.
Retail is a sector that more and more investors are abandoning. A general trend towards online shopping is driving some traditional brick and mortar retailers out of business. Many have abandoned the space because it is very easy to make a misjudgment and end up with a total loss.
Burry is one of the value investors that continues to invest in the space with holdings in the likes of Footlocker (FL) and Gamestop (GME).
Bed Bath & Beyond sports a $1.42 billion market cap. As of the writing of this article, it trades at 13.4 times free cash flow, 0.98 times book value and has an enterprise value to sales ratio of 0.45.
Disclosure: author has no position in any names mentioned
Read more here:
- David Herro Likes European Banks and Industrials
- Buffett Is Not Betting on Gold
- Daniel Loeb Adds Opportunistically to 3 Compounders
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
