Michael Burry Just Doubled Down on Stocks

As you all know, Michael Barry, depicted in The Big Short by Christian Bale, made his millions by betting against the U.S. housing market in the lead-up to the 2008 global financial crisis by buying credit default swaps on doomed mortgage-backed securities. Barry was able to profit over 100 million dollars personally and made his investors around 700 million. He is known amongst the investing community as one of the great contrarians, with absolutely no fear to make big bets that fly in the face of conventional thinking.

Now, with the release of his latest 13F filing, we can see he's made two such bets: one on the U.S. regional banks that are currently under fire and one in Chinese tech that's been crunched over the past two years. So in this video, let's have a look at Michael Barry's latest buys and sells and discuss exactly what he's thinking might be behind these bets.

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So, for those that don't know, a 13F filing is an SEC filing that all institutional investment managers with over 100 million dollars in assets under management have to file at the end of each quarter. What it does is it shows us their stock portfolios, so we, the public, get a glimpse inside the portfolios of the world's best investors. It's an incredible resource, but of course, it comes with a catch: that catch being that we only get the info 45 days after the end of the quarter. But as you'll all notice, it's now mid-May and thus the 13F filings for Q1 have just been released.

So without further ado, here is everything Michael Barry did in Q1 2023. As you can see, he did a lot. He sold out of five stocks, including Black Knight and Curate, which we were discussing a few quarters back. Then he reduced 62% in GeoGroup, the private prison company, which was his number one stock for three consecutive quarters. He then bought 17 stocks, including names like First Republic and other regional banks. Finally, he added heavily to his positions in JD.com and Alibaba, the Chinese tech giants.

So, there was a lot going on, but I'm sure you guys can already see two prominent themes emerging here: buying regional banks and buying Chinese tech—two very controversial topics.

Let's start with the regional banks. Barry bought New York Community Bancorp, Capital One Financial, Western Alliance, PacWest Bancorp, First Republic, and Huntington Bank shares during the first quarter. Overall, these bets make up 24.26% of his portfolio, although now it's probably more like 22% as First Republic shareholders bit the dust.

I should also say that if you're interested in doing some research into any of these stocks that we discussed specifically in this video, I've actually made a Discover collection with Simply Wall Street discussing Barry's latest buys. For example, if you're interested in, say, Capital One, you can go and check out valuation, future growth expectations, past performance, financial health, and so on, just by clicking the link down in my Discover collection section in the description or in the pinned comment. If you decide you're interested in signing up for Simply Wall Street, you can also get 40% off their premium subscription and a free 14-day trial. So that affiliate link is down in the description and in the pinned comment if you wanted to take advantage.

Back on to Barry's bet on the regional banks, this is certainly an interesting move because, as we know, there are definitely problems at these community banks. Even if the Fed is ensuring all depositors will be safe, it certainly does not mean that shareholders will be saved. So what on Earth is Barry doing here?

Well, my best guess—and I should say I don't know 100%—but my best guess is he's making a diversified bet on regional banks as he feels the sell-off is overblown. I mean, basically all of these banks have been sold off anywhere between 30% and 90%. So I think he realizes he can't necessarily make a big bet on any one bank in particular, as who knows where the next bank run could happen. It's all very psychological with depositors.

Generally speaking, the risk-reward on owning a basket of these stocks could be worth it in his eyes because the prices are just so low. This is kind of like what Warren Buffett has done in the past with the airline stocks and what he's doing right now with the Japanese trading companies. He can't necessarily pick a clear winner of the bunch, but he thinks the group as a whole will do well, so he makes a basket bet.

This is particularly prudent when you're talking about the regional banks, because bank runs, which collapse these companies, are very psychological, and you can't simply predict which depositor base will run for the hills. You can kind of get a sense by looking at which banks are in worse shape or are taking big losses due to withdrawals, but when we're talking about bank runs, it is still very psychological and thus fairly unpredictable. It’s a very much a cascade of depositor behavior that could happen anywhere.

So, anyway, that's my theory. I guess it does line up well with what he's said on Twitter, too. In mid-March, after the collapse of SVB, he tweeted that he expected the banking crisis to resolve very quickly and that he didn't see true danger here. Now, that mentality certainly lends itself to the theory that Barry is making a basket bet on heavily beaten-down community banks.

However, I've also heard some people saying that Barry's bets on the community banks could, in fact, highlight the opposite thesis: that he's actually betting against the banks. For example, this article from CNBC said the shares he bought could just be for covering short positions in the banks.

Now, the way shorting works is that you firstly borrow someone else's shares and then sell them at the current market price. You hope that the shares fall so that you can buy them back cheaper, return them to the person you borrowed them from, and then you pocket the difference. Now, it's true that short positions don't show up in 13F filings, so this could be the case, but I'm just not sure if you'd have shares sitting on your books waiting to cover a short position.

My understanding is that you choose to cover a short position and that whole transaction is just resolved immediately. I mean, personally, I don't short, so I don't know for sure. Hey, Michelle highlighted that when you get up to this kind of level as an investor, oftentimes anything goes. You're pretty much playing more of a custom game with your broker than what we are down at ground level.

Honestly, I just don't see it. To me, this thesis seems less likely, but I can't necessarily rule it out. Definitely let me know in the comments section if you have an opinion here. The other rationale I heard from people is that owning the stock could form part of some type of hedging for an option strategy where he's actually betting against the banks. But again, I don't think this works out either, as you do have to report put and call option positions alongside your equity portfolio each quarter, and this time around there were no options bets from Michael Barry.

So, my conclusion, anyway, is that Barry is most likely doing the plain and simple approach of making a basket bet on the U.S. regional banks and is hoping that while some may fail, overall the risk-return is there as a group—considering most of these stocks are just so beaten down.

That was definitely the first really big bit of news from Michael Barry this quarter, but beyond that, we also have another big topic of discussion, and that is that Michael Barry is doubling down on Chinese tech. In Q1, he added 233% to his JD.com stake and doubled his Alibaba position. These two stocks now occupy the top two spots in his stock portfolio. JD sits at 10.26%, and Alibaba is just slightly behind at 9.56%.

Now, this is interesting because last quarter was the first time that we'd seen JD and Alibaba pop into his portfolio. At the time, we were all just wondering if maybe this was a short-term play by Michael Barry, as we all know he doesn't shy away from a short-term trade—particularly because in Q4 last year, that was when we were seeing the relaxation of China's strict COVID policies.

But at least for now, it does seem like he has grander visions for these positions. By adding a lot more in Q1, he now has a 10 million dollar position in Alibaba and an 11 million bet on JD. Again, I could be wrong, but I personally see this as a bit of a turnaround bet on two really solid Chinese businesses that have both seen their share prices destroyed over the past two years.

It'll be interesting to see if these positions do truly turn into long-term bets, though, as, of course, I don't think these companies are going to get back to, you know, record performance overnight. For example, on Tuesday, it was reported that China's consumer spending and industrial activity grew at a slower pace than expected in April, with many analysts predicting tougher conditions for the rest of the year.

So, things might take a little while to improve over in China. However, in both of these companies, we are starting to see glimmers of hope. I mean, in the last report of the quarter, Alibaba did show improving revenue, gross profit, operating income, and net income. While JD showed a seasonal reduction in revenue and gross profit in their most recent quarter, they did post improved operating income and net income both quarter-over-quarter and year-over-year.

So, while China is still definitely sluggish and there hasn't been too much of an overall lift in the stock prices so far, there does seem to be little glimmers of light at the end of the tunnel.

So, those were the big two bets by Michael Barry for Q1 of 2023. But I do just want to finish the video by highlighting one very important consideration that does seem to get forgotten about when looking at his portfolio, and that is cash.

I mean, it's certainly easy to see the massive long list of buyers and think that Michael Barry has just turned super bullish and he thinks the tough times are over because he's buying back in. But it's important to remember that if you look at his total portfolio size reported in the 13F, it's only 106 million. If you look back a few quarters, we can see he had 165 million in the market at that time.

Now, that doesn't mean he's lost 60-odd million dollars—he's of course held that out of the market, and chances are he probably has a lot more cash than the reported 165 million dollars that he had in the market in Q1 of 2022.

So, long story short, Michael Barry isn't really going all in on the market again. He's actually sitting in a giant pile of cash, waiting for more opportunities, exactly what Warren Buffett is doing over at Berkshire Hathaway.

While these 13F filings are always cool to look at, we have to remember the big picture. Ultimately, they don't show short positions, they don't show us international equities, and they don't show us cash positions. So, we definitely need to put our critical thinking caps on when trying to make inferences from this kind of data.

When you do that with Michael Barry's 13F, all of a sudden, it really starts to line up with the general sentiment he's been discussing over on his Twitter—that being that he's still a bit bearish on current market conditions.

But with that said, guys, that will do us for this video. Definitely let me know your thoughts and opinions regarding Michael Barry's portfolio down in the comments section below. Also, if you've made it this far through the video, I'd really appreciate you hitting the subscribe button. We're trying to get to a million subscribers, so your help is very much appreciated.

But apart from that, guys, please leave a like on the video if you did enjoy it. With that said, I'll see you guys in the next one.