Astrid Stawiarz
Michael Burry’s claim to fame was his prescient call on mortgage-backed securities (and the housing market in general) prior to the 2008-2009 mortgage blowup. He made a great deal of money for his investors and himself, and then took a number of years off. He’s been back for some time now, and I’ve been covering his picks quarterly ever since he became required to report them to the SEC on a quarterly basis.
While Michael Burry has been outspoken on his bearish beliefs recently (especially on Twitter) his expressions of concern about inflation, the economy, and markets in general (as well as politics) tend to disappear shortly after he posts them. One resource that is worthwhile for those interested in following the investor is an archive of his Twitter posts you can find here. I cover his positions every quarter, most recently here, and you can always follow me to get notified of future updates.
This update is likely going to be shorter than usual, simply because he is down to only one reportable position. This is where I need to jump in and mention that the Form 13-F (from where I retrieved this data) doesn’t require listing foreign positions, private companies, or certain types of derivatives. So, as an example, anything from credit default swaps to investments in Japanese small caps wouldn’t appear in the public form. I’ve heard rumors that Dr. Burry has been buying those aforementioned Japanese value stocks, but haven’t been able to substantiate them. What is known however is that he closed all of his positions during the most recent quarter. This included longs from a variety of industries (everything from big tech to oil) and also a large position in Apple puts. Those were all liquidated during the quarter and he had only one reportable position as of the end of June – GEO Group (GEO).
This operator of private prisons is a position Dr. Burry has held in the past, and one that fits a number of his beliefs. While I try pretty hard to stay out of politics, I’ll just comment that his predictions for mid-terms would probably be good for the private prison industry. A recession generally also increases the crime rate – and since private prisons are often “overflow” type populations, their occupancy can vary quite significantly. The whole sector has a value investing distastefulness to it, which is probably one of the reasons why the firm trades where it does.
The other big factor here is their debt levels. One way that the distastefulness hurts them is that it (along with their high gearing) will make it hard for them to refinance. They are working on the issue with a debt exchange offer for a variety of their bonds. While this exchange offer is on schedule to expire August 16th at the close of business, it does appear that the bond markets are firming up for them, with their debt trading relatively strongly since the offer was made. It won’t help their profitability, as the coupon on the new debt is higher than that on the old debt, but it will remove a significant liquidity cliff in 2023/2024, which is very helpful as it gives them more time to get the operations back to firmer footing. As an aside, it also gives the current unsecured debtholders the chance to jump into a second lien position, which would almost certainly improve their recovery in the event the company does need to file. There is also a bit of reflexivity here – the shares have jumped on the news that Burry has bought in, which probably adds a bit of safety margin to the bonds as a higher stock price improves their ability to raise capital.
A successful debt exchange has a bit of a flywheel effect, as it adds option value to the stock, simply by increasing the amount of time the company has for something good to happen. If they can reduce their near term liquidity such that they have runway past the 2024 presidential election, there is a chance for the political climate to change in their favor nationally. It also gives them more time for their various other initiatives to play out, and improves their bargaining power for negotiating either new contracts or the sale of the property at their facilities. I think in the very long run that is probably the most likely outcome here – the state ends up owning these prisons. The big question mark is who they buy them from (equity holders or creditors) and what price they pay. The large amount of debt makes the equity very sensitive to changes in enterprise value here.
Conclusion
Dr. Michael Burry has demonstrated in the past that his ideas are worth following. Not that I ever advocate blind mimicry of any investor, but rather I suggest looking at those who have demonstrated quality analysis and results in the past and checking their ideas for things that you understand and can independently analyze. I believe that is a great way of unearthing new ideas, and so I continue to follow Dr. Burry’s investments.
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