Michael Burry: Buy the Dip Now?
On Thursday, Michael Burry, the “Big Short” investor, acknowledged that his earlier bearish prediction about the stock market had been disproven by traders who were buying the dip.
Burry, who famously bet against the housing market before the 2007 subprime mortgage collapse, is well-known in the investing community.
In a tweet on Jan. 31, Burry had simply stated “Sell,” which was widely circulated online and interpreted as a bearish call on the broader market.
However, in his recent tweet, Burry admitted that he was wrong to say sell. It’s worth noting that Burry tends to delete his tweets. So is a good time to buy the dip or is it too late? First, let’s take a look at what Michael Burry is investing himself.
What is Michael Burry Investing?
Michael Burry’s most recent 13F filing reveals his largest holdings. Firstly, his biggest investment is in GEO Group (GEO), a controversial company that owns and operates private prisons and immigration detention centers in the US and other countries. Despite being cheap and unglamorous, GEO has risen by approximately 56% over the past 12 months, and Burry seems to be confident in the company’s long-term prospects. Burry sold half of his shares in Q4, but it is unclear whether he will hold onto the rest or sell them soon.
Secondly, Burry has invested in Black Knight (BKI), a merger arbitrage play that is being acquired by Intercontinental Exchange (ICE) for $68 plus 0.144 ICE shares. This deal is good for a roughly 31% return, and Burry likely believes that the deal will go through despite opposition from antitrust regulators.
Burry’s third investment is in Coherent Corporation (COHR), a manufacturing company that supports the semiconductor industry. Trading at approximately 12x 2023 earnings with 20% annual growth potential, Burry’s investment in this company appears to be a wise move, considering the US government’s recent spending on moving semiconductor supply chains onshore.
Burry is also making moves in China with stocks such as Alibaba (BABA), JD.com (JD), and MGM International (MGM). Burry previously tweeted about the cheapness of Chinese stocks, and the recent rally in Chinese shares seems to support his prediction. His investment in MGM may be a bet on the reopening of the Chinese economy and a return to high levels of profitability for Macau casinos.
Lastly, Burry has invested in Wolverine World Wide (WWW), a shoe company that has recently experienced a significant decline in value. With a strong history of profitability and a low earnings multiple, Burry may be betting on a reversion to the mean for this company.
Is it a good time to buy the Dip in the Stock Market?
In short, I believe so. Here’s why:
- The pace of inflation is decelerating
High inflation rates have been a major impediment to the stock market. Escalating prices create uncertainty in the markets due to their detrimental effect on companies’ profitability and margins. Consequently, investor confidence can be eroded.
However, indications suggest that the restrictive monetary policy is starting to take hold. The Bank of England and the Federal Reserve have both initiated a sequence of interest rate hikes. The UK’s base rate is presently at 4%, while the federal funds rate is higher, ranging from 4.5% to 4.75%.
Inflation rates in both nations are moderating. In the UK, inflation has dropped to a still-substantial 10.1%, down from last year’s 41-year high of 11.1%. In the US, it is falling at a faster pace. January’s CPI data indicated a 6.4% inflation rate, down from last year’s high of 9.1%.
If inflation keeps declining, central banks will have more leeway to ease monetary tightening. This is generally viewed as optimistic for the stock market.
2. Avoiding economic downturns
There is an old adage frequently cited by investment analysts: “The stock market is not the economy.”
While this is accurate, the two are inherently interconnected. Anemic economic expansion, high unemployment, and recessions may all harm equity valuations. Additionally, macroeconomic expansion catalysts such as innovation and technological breakthroughs drive stock price appreciation.
Robust employment figures in the United States indicate that the American economy may avoid a recession this year. The International Monetary Fund (IMF) is more pessimistic about the UK’s prospects, but because FTSE 100 shares derive roughly 82% of their revenue from foreign markets, the index is more reliant on overseas economic growth than domestic growth.
While there is still a lot of uncertainty, if economic downturns can be averted, equities could benefit.
3. China’s reopening
Finally, one factor that may boost stock prices this year is China’s economic reopening. China’s “zero Covid” policies over the previous two years have had a significant impact on supply chains and global growth.
As the world’s second-largest economy, China is a critical player in determining stock market performance. Expected stimulus measures and a relaxation of strict public health protocols may provide positive momentum for equities.
A note on risks
Although optimistic factors may continue to drive stock market expansion, caution is advised. Investing offers no guarantees, and circumstances can change rapidly.
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