Michael Burry has made a name for himself within the investing world and beyond over the years, as his bet on the subprime housing market crash was the basis for the movie The Big Short. Because of the prescience of this investment and the additional attention it garnered thanks to the movie, many investors like to track Burry's portfolio moves.
His trades during the most recent quarter have certainly captured the imagination of investors. According to the latest 13F filing, Burry's Scion Asset Management sold out of all of its previous holdings, including the likes of Booking Holdings, Bristol Myers Squibb, and even his infamous Apple puts, and now holds just one newly initiated position in a single controversial stock: Geo Group(NYSE: GEO).
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Chump change?
Geo Group, with a market cap of less than $1 billion, is a company that provides private correctional, detention, mental health, and residential treatment facilities in the U.S. and overseas. While Burry's investment in Geo Group certainly raises eyebrows, here's the reason that I don't think it lives up to some of the hype it has been getting online: It's not a particularly big bet for Burry. Burry owns 500,000 shares of Geo Group, with a reported average purchase price of $6.60, making it about a $3.3 million position for him.
For investors like you and me, this sounds like a large position but it's not a big investment as far as institutional investors or hedge funds are concerned. For example, during the first quarter of 2022, before Burry sold out of all of his prior positions, his portfolio was valued at $165 million. So with a $3 million investment, it's not as if Burry is going all in on Geo Group.
A statement on the broader market
The small position leads me to believe that selling everything besides Geo Group is more of a way for Burry to express his view on the market itself than pound the table for Geo Group, per se. Burry is known for going against Wall Street consensus, and with bullish sentiment returning to the market as the major indexes have rallied off of their lows, it's likely that Burry feels the market is overheated in the short term and decided to go to cash. For example, he recently tweeted about the Nasdaq's recent rally and historic bear market rallies, before deleting the tweet, as is his modus operandi.
This isn't to say that Geo Group isn't without its merits, which likely also have played some part in attracting Burry's investment. Without delving into politics, the company's core business is providing private correctional and detention facilities, which some investors will always shy away from. This sentiment is music to a contrarian like Burry's ears, and going against the grain can lead to opportunities to acquire undervalued stocks. Geo Group trades at 15 times earnings but just 7 times next year's earnings, which is far below the average market multiple.
The position could also be a directional bet by Burry. Many pundits believe that Republicans will gain control of one or both houses of Congress in the upcoming midterm elections, which could lead to a return of policies that are tougher on crime. There's certainly some merit to this viewpoint and Geo Group could indeed be a beneficiary in this scenario.
Should investors follow Burry's lead?
Ultimately, there are a few reasons I don't think investors need to follow Burry into this position. As mentioned above, it is a fairly small stake by Burry and not a meaningful position in the grand scheme of things. Secondly, looking at a five- or 10-year chart shows that shares of Geo Group have lagged the S&P 500 badly over the past decade. While shares may be getting a short-term bump, the stock doesn't have a track record of creating good returns for shareholders, and many investors would be better off simply investing in companies that have created long-term value.
Lastly, 13F filings only show a snapshot of the previous quarter, but more than six weeks into the third quarter, it's possible that Burry no longer even owns this stock. With a current price of about $7.70, shares have already gained about 16% since his purchase. It's possible that Burry has already sold out and pocketed a nice gain on the stock, especially given his view that the market is frothy.
I love to follow 13Fs and the moves of iconic investors as much as anyone, and the stock may have its merits. But in this case, I think investors would be better off doing their own due diligence and buying some long-term winners with proven track records instead of simply following Burry.
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Michael Byrne has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Booking Holdings, and Bristol Myers Squibb. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
