The Big Short’s Michael Burry Reveals His Top Stock Picks

Despite being one of the few prominent investors in the world to recognize the bubble brewing in the subprime mortgage markets and the crisis it would lead to when it burst, Michael Burry received only limited recognition for his talent until renowned writer Michael Lewis of ‘Moneyball’ fame wrote about Mr. Burry’s journey in the 2010 bestseller ‘The Big Short: Inside the Doomsday Machine’. That recognition has turned into even greater fame more recently after the release of the movie by the same name, in which Mr. Burry is played by star actor Christian Bale. As the ending of the movie showed, even after making outsized gains during the financial crisis, Mr. Burry soon closed his hedge fund, Scion Capital LLC, due to the continuous redemption pressure he faced from his investors while betting against the housing market. However, what the movie didn’t show was that Mr. Burry has been back in the game since 2013. He started another hedge fund, Scion Asset Management, LLC, later that year and although he has been predominately investing in water, his fund recently revealed a fairly large U.S equity portfolio, submitting its first 13F filing with SEC, for the reporting period ending December 31. According to the filing, Scion Asset Management, LLC’s U.S equity portfolio was worth nearly $80 million at the end of 2015 and its top-10 holdings amassed 80.79% of the value of that portfolio. In this article, we are going to analyze the maverick investor’s top five bets for 2016.

We determine hedge fund sentiment by analyzing the equity portfolios of some of the best-performing hedge funds and institutional investors. Through extensive research, we have determined that the due diligence that these investors employ, as well as their long-term focus makes them the perfect targets to emulate (see the details here).

#5 First Solar, Inc. (NASDAQ:FSLR)

– Shares Owned by Scion Asset Management (as of December 31): 100,000

– Value of Holding (as of December 31): $6.6 million

Unlike most of its peers, which have slumped quite hard over the past few months, First Solar, Inc. (NASDAQ:FSLR) has been on an upward march since the start of the fourth quarter, rising by 48.24% during that period. Amid a broader market decline in 2016, the stock has continued to outperform, losing only 3.82% year-to-date. Most analysts feel that First Solar is one of the best alternative energy stocks to own, especially in the wake of the climate change deal approved by members of over 200 countries at the UN Climate Change Conference held at Paris recently. The stock has an average rating of ‘Overweight’ from the 21 prominent analysts who cover it and an average price target of $76.24, suggesting upside potential of over 20%. Analysts’ expect First Solar to report EPS of $0.77 on revenue of $929.80 million for the fourth quarter when it releases those results on February 23. Those figures would represent a year-over-year decline from the EPS of $1.89 on revenue of $1.01 billion that it reported for the same quarter of the previous year. Ken Griffin‘s Citadel Investment Group reduced its stake in First Solar, Inc. (NASDAQ:FSLR) by 98% to 470,527 shares during the fourth quarter.

#4 International Business Machines Corp. (NYSE:IBM)

– Shares Owned by Scion Asset Management (as of December 31): 50,000

– Value of Holding (as of December 31): $6.88 million

The downtrend that International Business Machines Corp. (NYSE:IBM) embarked up in early-2013 has continued this year, with its shares trading down by 8.4% year-to-date. Though this decline has made shares of the Big Blue extremely cheap, with them currently trading at a forward price-to-earnings multiple of 8.92, most analysts are still not convinced that the stock is a ‘Buy’ yet, though several value investors have been initiating or increasing their stakes in the company over the past few quarters. Analysts argue that the growth in the company’s cloud business and its new strategic initiatives program hasn’t been able to fill in the gap that the decline in its core business has rendered. However, on February 18, analysts at Morgan Stanley upgraded the stock to ‘Overweight’ from ‘Equal Weight’ and also increased their price target on it to $140 from $135.

Mr. Burry’s top three stock picks heading into 2016 are uncovered on the next page.

#3 Theravance Biopharma Inc (NASDAQ:TBPH)

– Shares Owned by Scion Asset Management (as of December 31): 436,626

– Value of Holding (as of December 31): $7.16 million

Shares of biopharmaceutical company Theravance Biopharma Inc (NASDAQ:TBPH) had quite a volatile 2015. After declining by over 50% during the first nine months of the year, they soared by 70% during October and November, before giving back over 12% in December. Though the stock is volatile this year too, it’s trading with a marginal loss of under 2% year-to-date. Theravance Biopharma Inc (NASDAQ:TBPH) is scheduled to report its fourth quarter numbers next month and analysts’ estimate it will be reporting a loss per share of $1.62 on revenue of $280,000. For the same quarter of the previous year, the company reported a loss per share of $2.02 on revenue of $1.30 million. Seth Klarman‘s Baupost Group, which was the largest shareholder of the company at the end of the third quarter among the funds that we track, continued to own 6.42 million shares of Theravance Biopharma Inc, at the end of December.

#2 Apple Inc. (NASDAQ:AAPL)

– Shares Owned by Scion Asset Management (as of December 31): 75,000

– Value of Holding (as of December 31): $7.9 million

After falling consistently from the greater than $120 levels that they traded at during early-November, shares of Apple Inc. (NASDAQ:AAPL) have bounced back recently, after hitting their 52-week low at $92. According to analysts, there is very little chance that the stock will fall much further in the short-term because it has entered oversold territory and trades at an extremely low valuation. However, aside from value investors, many investors are still wary of purchasing the stock. Despite having cash reserves in excess of $216 billion on February 16, the company made a $12 billion bond offering to raise money for “general corporate purposes” because it would have to pay a substantial amount in taxes to bring its cash reserves back to the U.S. On February 18, Apple, along with China UnionPay officially launched its payment platform, Apple Pay, in China. Activist investor Carl Icahn‘s Icahn Capital LP reduced its stake in Apple Inc. (NASDAQ:AAPL) by 13% to 45.76 million shares during the fourth quarter.

#1 NexPoint Residential Trust Inc (NYSE:NXRT)

– Shares Owned by Scion Asset Management (as of December 31): 670,800

– Value of Holding (as of December 31): $8.78 million

NexPoint Residential Trust Inc (NYSE:NXRT) was Scion Asset Management’s top stock pick going into 2016. Although shares of the real estate investment trust (REIT) are down by 13.45% year-to-date, the decline has increased its annual dividend yield to 7.27%. It has been less than a year since NexPoint Residential Trust Inc (NYSE:NXRT) was first listed on the New York Stock Exchange and the few analysts who have started covering the REIT are not very bullish on it, citing the large amount of debt on its balance sheet in comparison to peers. They are also concerned that its portfolio is filled with fixer-uppers, hence its growth largely relies on improving its properties and extracting higher rent from them. However, investors can find solace in the fact that insiders own 15% of the company and that its high annual dividend yield in comparison to other REITs lessens some of the risk associated with it.

Disclosure: None