Michael Burry is considered to be one of the best value investors of the past 20 years. He originally started attracting attention to himself in the late 1990s, when his write-ups on undervalued companies started appearing online. These write-ups attracted plenty of publicity, so much so that in 2000, he was able to set up his own hedge fund, Scion Asset Management.
Too much to handle
Between inception and when it closed its doors in 2008, during the midst of the financial crisis, Scion produced a total return for investors of 493.4%. But running the fund was too much for Burry, especially when investors started filing lawsuits against him after he decided to lock down their investments.
Burry had placed a large bet against mortgage-backed securities, which ultimately proved to be highly lucrative for the firm, but generated substantial losses in 2006 and 2007, which investors were uncomfortable with.
After the crisis, and shutting down his firm, Burry disappeared from the public eye. He went on to manage his own money privately. However, in the fourth quarter of 2015, Scion started filing 13Fs with the Securities and Exchange Commission again.Â
These filings give us an insight into what Burry is up to right now. As I covered back in February, according to his fourth-quarter 2018 13F, Burry is interested in undervalue real estate companies, such as Corepoint Lodging Inc. (CPLG, Financial), which owns midscale and upper-midscale lodging, comprising 316 hotels and more than 40,000 rooms across 41 states.
At the end of last year, he also had positions totaling approximately $20 million in real estate groups Alexander & Baldwin (ALEX, Financial) and Five Point Holdings (FPH, Financial).
First quarter buying
According to data compiled by GuruFocus, Burry offloaded his Alexander & Baldwin holding during the first quarter of 2019, but he also added several other exciting businesses. These include GreenSky Inc. (GSKY, Financial) and PetIQ Inc. (PETQ, Financial).
According to GuruFocus' data, Burry purchased 106,232 shares of PetIQ, giving it 3.40% portfolio weight, and 272,021 shares of GreenSky, giving it 3.59% portfolio weight.
GreenSky is the most interesting of these two businesses. The company provides point-of-sale financing and payment solutions to merchants, consumers and banks, but since its IPO in 2018, the stock has collapsed in value. It went public at around $26 per share and fell to a low of nearly $8 per share at the end of 2018. It has since recovered some lost ground, trading as high as $16 per share during the first half of 2019, although the stock has since fallen back to around $12. Approximately 16% of the company's outstanding shares are on loan to short sellers.
So, it appears as if the market hates this business. But what does Burry see?
It might be the fact that underneath all the negativity surrounding the company, there is a healthy business model here. For fiscal 2018, the company generated free cash flow per share of $1.32 and reported an operating margin of nearly 37% and return on capital employed of 19%. These are quite attractive profitability metrics. On top of this, the stock is trading at a forward price-earnings ratio of 16.2, falling to 12.8 for 2020 according to current Wall Street forecasts. A multiple of nearly 13 times forward earnings for a company that's achieving a profit margin of almost 40% and a free cash flow yield of 11% looks very cheap.
Of course, it remains to be seen if the firm can hit these targets, but such a low valuation gives a margin of safety for investors.
Growing market
The market also seems to hate Burry's other first-quarter 2019 buy, PetIQ. Around 24% of this company's stock is currently out on loan to short-sellers.
PetIQ manufacturers, distributes and sells pet drugs and wellness products. The company isn't particularly cheap, but this is a large and rapidly expanding market, so Burry might be betting on market tailwinds to carry the group forward.
It has certainly proven itself during the past five years. Revenue has increased from just $162 million in 2014 to $529 million for 2018, and Wall Street estimates sales will hit $700 million in 2020. PetIQ will report its maiden year of profitability this year, according to analysts with earnings per share projected to hit $1.18 by 2020, putting the stock on a 2020 price-earnings ratio of 23.
That's not cheap, but if the firm continues to grow over the next five years as it has done since 2014, it could be.
Disclosure: The author owns no share mentioned.
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