Looking at what other investors are doing can, in my view, be a great way to try and figure out where the stock market is at. Michael Burry is a great example.
Burry has been saying for some time now that he expects a sharp downturn in share prices. And the regulatory filing from his Scion Asset Management firm earlier this week details what he’s been buying.
While the information in the report is now six weeks old, I think it still gives investors like me useful information. So how is Burry setting himself up to deal with the possibility of a stock market crash?
Burry’s portfolio
Two things stand out to me about Burry’s portfolio. The first is its size – the reported value of the Scion portfolio in September was $41m, compared to $165m six months ago.
In other words, Burry is keeping money on the sidelines. That’s what one might expect from an investor who has been expecting share prices to go down.
That’s an obvious way to set up for a stock market crash. And while I don’t think it’s a bad idea, I’m more interested in the stocks that Burry has been buying.
The second thing that I think is significant is the composition of Burry’s portfolio. Around 45% of the invested capital is in GEO Group (NYSE:GEO) and CoreCivic (NYSE:CXW).
Both of these stocks have done very well this year. Over the last 12 months, GEO is up 12% and CoreCivic is up around 8%.
So what are these stocks and what does Burry’s ownership of them tell me about the stock market?
Stocks
GEO and CoreCivic are both companies that own and manage private prisons. One feature of this is that they both own significant amounts of real estate.
At the start of 2021, President Biden issued a directive to not renew contracts with private prisons. The share price of both companies fell significantly as a result.
In fact, the share prices fell by so much that the shares started to look cheap compared to the asset values of the underlying businesses. That’s when Burry began buying the shares.
Right now, both companies are selling their properties to the US government. And they’re doing it at prices well above the real estate values listed on their balance sheets.
In other words, GEO Group and CoreCivic both have tangible assets worth more than their share prices. I think that this means that these are stocks trading in deep value territory.
Stock market
In my view, Burry is one of the most sophisticated stock market participants around. Trying to read his mind by deciphering his stock portfolio is a tricky business.
Nonetheless, I think that two things stand out clearly. The first is that Burry is expecting the downturn in share prices to continue.
Burry has been forecasting a stock market crash for some time. And it looks to me as though he’s setting himself up for that to happen by keeping cash on the sidelines.
The concentration of value stocks is interesting to me as well, though. It leads me to believe that Burry expects value to outperform growth for some time, which gives me plenty to think about in buying shares at today’s prices.
