Michael Burry's 'Big Short' Against the Stock Market

Well, Michael Barry has been back in the news lately with a bombshell tweet. It turns out Christian Bale was actually wearing Michael Murray's clothes in The Big Short, which does beg the question, whose clothes was Michael Barry wearing? Yes, the award-winning actor. Oh, hang on, and I think this might be the wrong tweet. Dude, ah no, my bad. Here we go, no, this is the right one.

Michael Barry has recently taken to Twitter to say, unprompted, "You have no idea how short I am." That sounds a little bit more like it, and no, I don't think he's referencing his height. To tell you the truth, this is very interesting news because it lies perfectly with the release of his most recent 30 NF filing, which is, of course, a quarterly 13F filing that he has to submit.

That shows the general public everything that's in his stock portfolio, AKA his stock picks. It becomes public knowledge for all of us to take a look at. So in this video, we're going to explore what Michael Barry has been up to with his investing lately and also dive a little bit deeper into his latest tweet to see what he really means.

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So let's start with Michael Barry's 13F filing—his latest buyers and sells for Q3 of 2022. To add some context, I just want to briefly remind you of how Michael Barry invests. So Barry, like Warren Buffett, Charlie Munger, and Lee Lou, is very much value-minded. He's definitely a value investor.

The thing that really differentiates him from those other investors, though, is that he doesn't necessarily buy and hold. You know, he likes to dance—one quarter he'll be in, the next quarter he'll be out. But what you can notice over time, if you look closely, is that there are some stocks that do show up, you know, reasonably often. For example, this is his latest 13F activity: he added to Geo Group, then he also bought into Curate, Core Civic, Aerojet Rocketdyne, and Charter Communications, and Liberty Global Group.

If you take a look at his activity over time, you'll notice that Geo Group, Curate, and Core Civic actually appear fairly regularly, even though he likes to chop and change from quarter to quarter. So this suggests to me that Michael Barry does genuinely have a long-term thesis for these businesses but simply likes to buy and sell based on price fluctuation, as opposed to what most value investors would do, which is simply buy and then hold.

But with that said, let's take a quick look at these repeat offenders, starting with the biggest position, which is Geo Group. Now, Geo Group is not a stock that I follow a lot at all, to be honest. So over the past few days, I've been hitting the books over on Seeking Alpha, who are also the sponsor of today's video, to try and get up to speed with the stock.

While I was reading, I found this really good article written by Ben Clarence, and I think this line perfectly describes what Barry is thinking with Geo Group: "Successful deep-value investing requires investors to get comfortable wading through the mud in order to seek out diamonds." That's exactly what this business is about.

Because, for those that don't know, Geo Group is the world's second largest private prison company. It's not glamorous—it's up there with funeral providers and sewage processing and garbage collection. On top of that, Ben notes, "Geo Group has been amassing long-term debt through bond issuances recently, and this has weighed on their balance sheet quite significantly."

Geo's coverage ratio of 2.49 suggests that 40 percent of net operating income is servicing the immense debts the firm has accumulated, which represents a concern. These are backed by a measly 1.21 current ratio. Now, normally, seeing this stuff immediately turns off 90% of investors, and for Michael Barry, I think that's the point.

Barry is looking for a diamond in the rough; he's looking where others aren't. If you dig a little bit more, you can start to see his thesis emerge. For example, if you open up their most recent earnings call transcript on Seeking Alpha, you can see it says, "We've reduced our outstanding debt maturing prior to 2026 from 2 billion to just 23 million." Okay, much more manageable for Barry's investment horizon.

Then, beyond that, let's not dismiss the fact that, you know, whether you like it or not, private prisons can bring in stable revenues over time. Revenue and operating income have been pretty consistent, with only a minor pandemic slump. Generally, they're slowly growing over time.

There's also a pretty interesting factor relating to Biden's interest in transitioning away from private prisons, how that might actually help private prisons do better, but a little more on that in a bit. Lastly, and the thing that I would guess Michael Barry is most interested in, is the price.

Shout out to Daniel from Unrivaled Investing for highlighting this in his recent video: if you look at their last three quarters of earnings and add that with their guided 30 million for Q4 of 2022, then overall, you get 160.2 million. Now, if you flick to the summary, you can see for Geo Group, currently, they have a market cap of 1.26 billion.

So effectively, you're paying a price-to-earnings of 7.87—so very low downside risk through the valuation—and you obviously have room for both earnings expansion or just multiple expansion. Also, quick shout out: as you can see, all this research I've shown here today is courtesy of Seeking Alpha Premium. This is actually a really good resource if you want just everything in one place.

You can follow whoever you want, you can read unlimited articles, you get access to all the news, you get 10 years of financial data for your analysis and your modeling. You've got earnings call transcripts, you've got valuation metrics, analyst ratings. You can import your portfolio; you can add alerts to a stock when it hits your margin of safety price. It's actually really, really good.

But anyway, if you did want to sign up to Premium, which is normally 239 dollars, you can actually get a whole year, and I'm not kidding, for 99. So the Seeking Alpha team has been very generous to us, and all you have to do is follow the affiliate link in the description or in the pinned comment, and you'll automatically have access to that special pricing structure.

So, full disclosure: you know that is an affiliate link. This video is sponsored, but as you guys know, if I didn't like it, I wouldn't be promoting it. But anyway, moving on to the next notable stock on the list—it is Curate, which is again another pretty boring value stock. So what is it? Well, it's a collection of shopping-related businesses, the most notable of which is QVC, which does those really boring infomercials that try and convince grandmas to buy ridiculous products from Chinese sweatshops.

I know what CNBC talking heads want to discuss that when they can talk about Tesla or Google, right? But this business, in a nutshell, is one that just ebbs and flows with how the consumer is feeling, and right now, the consumer is suffering, and so is Curate. You know, revenues are down, operating income is down, net income is now negative, and their free cash flow is suffering.

But despite these poor results, Curate does still reach 200 million homes worldwide, and with the stock down 75% in the last 12 months, I think Barry is making a bit of a speculative bet that, you know, the price is right should we get a turnaround in the economy in the next year or two. If we turn to the Seeking Alpha rating, we can see that Curate does score fairly well on multiple valuation metrics; however, it obviously does have some concerns to work through, no doubt.

So that's Curate. Lastly, the other repeat offender in Barry's portfolio right now is Core Civic. Now, this one's really quite interesting, and it's in the same industry as Geo Group. Core Civic is another big owner of private prisons, and again, it's a deep value play for a few reasons.

So, number one, the company made 84.3 million in free cash flow last quarter. If you annualize that out, you get a price of free cash flow of 12—certainly not expensive. But beyond that, a few investors that have been keeping up with Core Civic have been noticing that they might be sitting on a little bit more gold than they originally thought.

You see, with Biden's sentiment being to transition away from private prisons, what this means in reality is that U.S. Customs and Immigration Enforcement and the United States Marshals need to transition these inmates out of Core Civic's prisons and into other facilities. But the problem is, they have nowhere to put them. So these days, there really aren't that many new prisons coming online.

So if they want to end their partnership with Core Civic, they either need to build new prisons or the other option is to buy out Core Civic, buy the prisons off of them, and then run them themselves. But Core Civic knows this. In their most recent earnings release, they said, "We believe our renewal rate on existing contracts remains high due to a variety of reasons, including the aged and constrained supply of available beds within the U.S. correctional system."

But what's promising for shareholders is that even if the government got serious about buying Core Civic's prisons, it looks like Core Civic is going to make them pay up. For example, one prison they sold in Q2 was a 1978-bed correctional facility— they sold this for 130 million, while on the books, they only had it being worth about 80 million.

Also, shout out to the patient investor for that intel. He made a really good video recently on this topic that definitely opened up my eyes to what's going on in the space; definitely worth a watch. I'll leave that link down in the description.

But essentially, the sale of this prison represents 66,000 per bed, which would value Core Civic's portfolio of prisons at over four billion dollars. It's pretty crazy when right now the company has a market cap of 2.8 billion dollars. And the interesting thing is, I think management knows this too; they've been doing large share repurchases recently, hinting that their stock is undervalued.

So I think Barry sees potential value here, and like Geo Group, he wants in on the action. So there are three notable stocks in Barry's current portfolio, but there's definitely a big caveat here, which we definitely need to talk about.

You know, at the end of the day, Michael Barry really doesn't have all that much invested in these businesses. In Q3, his total portfolio size in the U.S. was just 41 million. But if we look at the history of his 13F filings, you can see in Q3 2020, his portfolio was 154 million. Who knows if he was even fully invested at that point in time?

So even if we assume that maybe Barry only has 154 million to his name—which I don't think is the case—then he's only sunk 26% of his cash into the market right now. This is where I think his latest tweet comes into the equation: "You have no idea how short I am."

Over the past few weeks, a lot of articles have been coming out saying things like "Michael Barry is buying again," "Check out Michael Barry's latest stock buyers," blah blah. So my hypothesis is that this tweet is probably a reaction to the media, and he's just reminding us that maybe this isn't the best takeaway and that he is definitely still bearish on the market.

Think about it: "You have no idea how short I am," suggesting that, yes, while he's bought five stocks, his overall market sentiment likely hasn't changed. Remember, that is a limitation of the 13F findings—while they do reveal an investor's portfolio, albeit 45 days late, one thing they do not show are short positions.

So, for all we know, Barry could have short positions three times the size of his equity portfolio; we just don't know. I think that definitely gives this tweet a little bit of extra weight and helps give us a little bit more insight into what Michael Barry is really doing in the market at the moment.

But anyway, guys, that will just about do us for this video. Thanks very much for watching, and of course, thanks to Seeking Alpha again for sponsoring. Remember, $99 Seeking Alpha Premium is yours to claim through the referral link down in the description or the pinned comment. Definitely check it out if you want.

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