Michael Burry, the main subject of The Big Short, which featured his predictions of the mortgage crisis, has publicly filed the third quarter holdings of his firm with the SEC. I've been following his holdings since his hedge fund, Scion Capital, began to publicly report at the beginning of the year, and this update covers his purchases and sales during the third quarter of 2016. Given his prescient history, I am always interested in seeing what he has purchased and sold.
This quarter included a large number of sales, as he pared his publicly reported portfolio down to four names. Unfortunately their are a number of asset types which are not required to be reported to the SEC on form 13F, including short sales, derivatives (options, credit default swaps, etc) and foreign securities. That means I can't say for certain whether Burry has allocated his freed up capital to cash for dry powder, or if he has another amazing derivative play on the books. I've included a table showing his purchases and sales during the most recent quarter below.
|Name of Issuer||Symbol||Value ($000s)||Q2 2016 Shares||Q3 2016 Shares||Purchase/(NASDAQ:SALE) during Q3|
|HCA HOLDINGS INC||HCA||$7,563||100,000||100,000||0|
|NEXPOINT RESIDENTIAL TR INC||NXRT||$0||609,905||0||-609,905|
|THERAVANCE BIOPHARMA INC||TBPH||$0||325,000||0||-325,000|
There were two additions to the portfolio this quarter, and they both fit the theme of uneconomic selling by market participants. If you assume the market gets it right most of the time (not an unreasonable assumption, even as a value investor) then trying to find counterparties who are not rational sellers is a good potential hunting ground. Both Coty and Gores Holdings fit the bill.
Coty is a beauty company, selling products such as fragrances, cosmetics, and hair coloring/care. The company's current price of $18.20 is only slightly above its 52 week low, and the distance from the 52 week high of $31.60 suggests something is wrong. The major issue with the stock at present appears to be shareholders who received stock from their purchase of assets from Procter & Gamble (NYSE:PG). That deal, which I participated in successfully and covered for subscribers of the Microcap Review, presented a relatively straightforward arbitrage. Shareholders of PG could exchange their shares for COTY shares at a ratio that gave them an automatic premium price. The deal also makes the recent reported financials less relevant, as the acquisition is of material size to COTY. The significant expansion in the supply of shares as well as shareholders who are selling to close out an arbitrage trade rather than for fundamental reasons provides a potential entry point.
The next company that would certainly have selling for non-fundamental reasons is Gores Holdings. Gores was a special purpose acquisition company (often called a 'blank check' company) that recently completed an acquisition of Hostess Brands, the makers of Twinkies. The company has been renamed Hostess Brands and the shares now trade under the symbol TWNK.
SPACs often are the subject of non-economic selling because of how they work. Generally speaking, a sponsor raises money by selling units at $10, which include a share and a portion of a warrant. The shares are redeemable at $10 if the buyer doesn't like the deal the sponsor presents, which gives them little downside (especially with low interest rates) and a free option. When they do move up on a deal the market likes, as with Gores, the hedge fund holders almost always sell to reinvest their capital into new deals. I wrote more on SPACs in my last quarter update on Glazer Capital's positions. Even if a fund likes the deal, they have the warrants to provide ample upside exposure.
Hostess Brands has been growing revenues, margins, and earnings materially. The company also has warrants outstanding under the symbol TWNKW, which provide a leveraged upside way to invest in the company. For a deep dive fundamentals view on Hostess, I suggest the following article by Seeking Alpha contributor Luis V. Sanchez.
The fund also made a number of sales this quarter, eliminating positions in Amgen, Neophotonics, Nexpoint Residential, and Theravance Biopharma. The Amgen sale looks like a winner, given that the company's share price is down $20 since the end of the quarter. I speculated in last quarter's update that the Neophotonics position was a swing trade, and it looks like that may have been his intention. Interestingly, the company's shares are down ~25% since the end of the quarter on an earnings miss, which may set the company up for another swing trade in the future. An article on the company and the current opportunity is here.
Following Michael Burry's positions is useful given his excellent long term track record. His ability to makes short term swing trades and identify sources of uneconomic selling of securities is also impressive.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TWNK over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.