Michael Burry (Trades, Portfolio)'s recent investment in Alibaba Group Holdings Ltd. (BABA, Financial) and JD.com Inc. (JD, Financial) has caught the attention of market observers, given the current sentiment toward Chinese stocks. The guru's contrarian investment style, which emphasizes buying assets at a massive discount to intrinsic value, suggests he sees a valuation gap in these stocks.
While some investors remain optimistic about China's long-term prospects, uncertainties related to its economic recovery and geopolitical tensions have contributed to the cautious approach of many Western investors. Burry's move to increase his investments in the Chinese giants suggest a mid- to long-term investment horizon and raises intriguing questions about the potential for a rebound in the Chinese market.
What type of investor is Burry?
Burry is a well-known contrarian investor who follows Benjamin Graham's fundamental value investing philosophy, which emphasizes the importance of buying stocks at a discount to their intrinsic value. He is famous for predicting the 2008 financial crisis by identifying the unsustainable practices in the subprime mortgage market.
The guru's investment strategy also revolves around buying assets at a significant discount to their intrinsic value. In his 2001 letter to investors, Burry wrote that he aimed to buy a dollar for 50 cents. He believes that volatility is his friend and looks for assets that swing between 40 cents and 60 cents. He argues that volatility is an undervalued quality that the markets have to offer, and most investors avoid it under the mistaken impression that volatility and risk are related.
Further, Burry's investment philosophy is based on the concept of a margin of safety. He does not differentiate between small-caps, mid-caps, tech or non-tech stocks. Instead, he looks for undervalued elements in all companies, regardless of their sector and class. He uses the ratio of enterprise value/Ebitda when researching investment ideas, as it is a better metric for comparing companies across different sectors than the price-earnings ratio.
Burry's most successful investment was his bet against the subprime mortgage market. He saw the risks posed by millions of borrowers with low income and few assets buying homes and cars with tremendous leverage. The guru realized the banking system valued these mortgages as if they would all be paid, which was unsustainable in the long term. So he began shorting those stocks and made $100 million for himself and $700 million for his investors when the market collapsed.
Overall, Burry is not just a short seller. He is a value investor who looks for a wide margin of safety in everything he does. He believes most investors prefer the illusion of certainty that comes with buying stocks at a premium rather than taking a chance on volatile but attractively priced value stocks. He believes there is a bubble in passive investing and that these overvalued investments will come down to earth sooner or later.
The new stake In China
During the first quarter, Burry's hedge fund, Scion Asset Management, made significant moves in the Chinese market.
For the three months ended March 31, the 13F filings revealed the firm held 100,000 shares of Alibaba, double the amount from the previous quarter, and 250,000 shares of JD.com, more than triple the previous quarter's holdings. They are now its two largest positions.
Meanwhile, Bridgewater Associates, the hedge fund founded by China bull Ray Dalio (Trades, Portfolio), reduced its Chinese holdings. The firm sold all 702,473 shares of Baidu (BIDU, Financial) and trimmed its stakes in e-commerce platform PDD Holdings (PDD, Financial), electric vehicle manufacturer Nio (NIO, Financial) and social media platform Weibo (WB, Financial) by 35% to 45%.
The opposing sentiments of these two prominent hedge funds reflects the changing dynamics in the Chinese market. While Burry is bullish on China's tech giants, believing in their long-term potential, Bridgewater appears to be more cautious, reducing its exposure.
The broader investor sentiment toward Chinese stocks has also shifted. For instance, global hedge funds have sold 45% of their net purchases of Chinese stocks from the previous quarter, with their net exposure to China dropping from 13.30% in January to 10.50%. Uncertainties surrounding China's economic recovery, geopolitical tensions and disappointing retail sales and industrial production growth have contributed to the cautious stance.
Despite the current challenges, some investors remain optimistic about China's long-term prospects. Short seller Burry's long move could indicate it is an opportune time to buy and hold Chinese stocks.
Why did he invest in China and banks?
Burry's hedge fund now holds positions worth $10 million each in these e-commerce giants, as reported in a regulatory filing. The investor's bullish stance on these companies comes at a time when many investors are turning away from the Chinese market due to concerns about investment restrictions, slower growth and geopolitical tensions.
The move also aligns with Burry's reputation for taking positions that go against prevailing market sentiment. In addition to his bet against the subprime mortgage martker, other past successes include his notable involvement in the GameStop (GME, Financial) frenzy in 2019, when he identified the company as undervalued. In contrast to other hedge funds that sold a combined 4 million JD.com shares in the first quarter, Burry's decision to increase his stake showcases his distinctive investment approach.
Notably, his investment choices extend beyond the Chinese tech sector. He also snapped up shares of smaller regional banks, such as First Republic Bank (FRCB, Financial) and PacWest Bancorp (PACW, Financial), during the banking crisis. Burry's portfolio contains investments in other banking institutions as well, such as Capital One (COF, Financial), Wells Fargo (WFC, Financial), Western Alliance Bancorp (WAL, Financial), New York Community Bancorp (NYCB, Financial) and Huntington Bancshares (HBAN, Financial). These investments reflect his strategy of identifying undervalued opportunities during times of market turmoil.
As of the first quarter, Scion's U.S. equity portfolio had a market value of about $107 million.
Does he see China as a long- or short-term trade?
In 2022, Burry made bearish predictions about the stock market, anticipating a crash due to persistent inflation. He even advised investors to liquidate their stock holdings. As a result, he sold off 99% of his positions, including large-cap stocks like Alphabet (GOOG, Financial), Warner Bros. Discovery (WBD, Financial) and Meta Platforms (META, Financial), retaining only one position in Geo Group (GEO, Financial).
As such, Burry's exposure to China raises intriguing questions. China experienced a turbulent year in 2022, which was marked by stringent lockdown measures and geopolitical and regulatory challenges. As a result, companies like Alibaba and JD.com endured massive declines in their value.
The guru's move to invest in these stocks indicates he is betting on a rebound in the Chinese market. However, hedge funds must report their long positions, not their short ones. Burry may have made different predictions for 2023, which could be magnified in his short positions.
Interestingly, Burry shared a bearish thesis on the American economy via Twitter, forecasting a recession this year. Despite the stock market's solid start, with the S&P 500 rising over 9% year to date and tech stocks experiencing bullish momentum, he remains skeptical. He believes the rise of excessive speculation has led to significant overvaluation in the stock market, which he expects will eventually reverse, resulting in a severe downturn.
It is important to note Scion's portfolio holdings undergo cyclical changes based on historical patterns of rapid reallocations and position exits. As such, the duration of Burry's investment in China and his overall perspective on it as a long- or short-term trade remain unclear and may depend on future market conditions and developments. Nevertheless, considering the progressive move (quarter over quarter), Scion may hold on to China for the mid to long term.
Takeaway
In conclusion, Burry's recent investments, particularly his increased holdings of Alibaba and JD.com, reflect his contrarian approach and willingness to challenge prevailing market sentiments. Being effective in undervalued opportunities, his decision to invest in the Chinese market raises intriguing questions about his long-term outlook and the potential for a rebound.
While the broader investor sentiment toward Chinese stocks remains cautious, Burry's bullish stance showcases his belief in the long-term potential of these companies. Only time will tell whether these investments are a short-term trade or part of a larger strategy, but the investor's actions again demonstrate his unique investment style and ability to navigate challenging market conditions.
