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Michael Burry’s Warning On Inflation and His Top 6 Stock Picks

·7 min read

In this article, we examined why Michael Burry warns of inflation and why he compares current conditions to 1977. We also reviewed inflation resistant top 6 stock picks of Michael Burry. You can skip our detailed discussion and jump directly to Michael Burry's Top 3 Stock Picks.

Michael Burry of Scion Asset Management, who is popular for his profitable bets against the mid-2000s housing bubble, now warns his followers that the current market conditions are reminiscent of historic inflation in the 1970s. Burry, born in 1971, shared a picture of his childhood photo in his first tweet after three months along with the caption, "1977 says hello." The tweet may refer to stagflation similar to 1977 which created a massive bearish trend in stock markets with Dow Jones Industrial Average collapsing 17.2% and S&P 500 plummeting 20% before bottoming out. Stagflation occurs when economic growth slows down while unemployment and inflation increase substantially.

What Happened in 1977?

After two years of robust growth in 1975 and 1976, the Dow Jones plunged more than 17% in 1977 due to several factors, including easy money policies since the early 1970s, soaring oil prices, rising unemployment, and increasing consumer prices. In 1977, investors were concerned about the widening U.S. trade deficit and worried that the Fed might tighten credit, which would trigger an increase in interest rates. In addition, a combination of the recession and struggling industrialized democracies also contributed to bearish sentiments.

History Might Repeat in 2022

Currently, several signals such as rising oil prices, record inflation, concerns about the interest rate hike, and sanctions on a top commodities producer pose a risk of return of investors sentiment to 1977.

A spike in oil prices due to sanctions on Russia has raised concerns that higher energy costs will continue to stifle global growth and push up consumer prices. In February, the Consumer Price Index (CPI), which measures a basket of goods and services, surged 7.9% year over year due to high food and energy prices. The uncertainty of the rate hike in 2022 is also similar to the uncertainty in 1977. Currently, investors are uncertain about how aggressively the Fed will tighten monetary policy. As a result, all of these concerns have wiped out 7% of the S&P 500's value since the beginning of this year, while Dow lost about 5% and tech-heavy NASDAQ is down 12%.

Michael Burry Overhauls His Portfolio

During the September quarter, Michael Burry of Scion Asset Management dumped most of his stock holdings, reducing the portfolio value (excluding options) to nearly $42 million from $140 million. He slashed the total number of stock holdings from around 20 to only six. In the December quarter, he followed his aggressive portfolio rebalancing strategy and dumped out 4 of his 6 stock holdings. Meanwhile, he also established new positions in AEA-Bridges Impact Corp. (NYSE:IMPX), Bristol-Myers Squibb (NYSE:BMY), Fidelity National Financial, Inc. (NYSE:FNF), and General Dynamics Corporation (NYSE:GD).

He also boosted his stake in CoreCivic, Inc. (NYSE:CXW) by 35%. As of December, Scion's largest position was an $18.7 million stake in Bristol-Myers Squibb (NYSE:BMY), and close to $17 million positions in Fidelity National Financial, Inc. (NYSE:FNF), and General Dynamics Corporation (NYSE:GD). The overall value of his portfolio surged by 79% quarter over quarter to $74 million.

Let's dig deeper into Michael Burry’s stock portfolio to see whether his stock holdings have the potential to outperform the broader market trends.

most successful short sellers of all time
most successful short sellers of all time

Michael Burry of Scion Asset Management

Our Methodology

We made use of Scion Asset Management's 13F portfolio as of December for this analysis.

Inflation Resistant Top 6 Stock Picks of Michael Burry

6. CoreCivic, Inc. (NYSE:CXW)

Scion Asset Management’s Stake Value: 5.5 million

Percentage of Scion Asset Management’s Portfolio: 7.43%

Numbers of Hedge Fund Holders: 16

Michael Burry has been showing confidence in CoreCivic, Inc. (NYSE:CXW) over the past five quarters. He initiated a position in the company in the final quarter of 2020 when its shares slid to $6 a share. During the December quarter of 2021, Scion Asset Management lifted its stake in CoreCivic, Inc. (NYSE:CXW) by 34.77% to 7.43% of the overall portfolio. Burry’s strategy of holding a position in one of the largest operators of private detention facilities appears to be working. Year to date, shares of CoreCivic, Inc. (NYSE:CXW) performed better than the broader market with shares down 6% compared to the S&P 500 selloff of 12%.

The company’s strategy of improving its capital structure by selling non-core assets, revoking its REIT election, and extending debt maturities helped in strengthening its balance sheet. Its fourth-quarter normalized FFO per share of $0.48 exceeded the Wall Street consensus of $0.45 per share. CoreCivic, Inc. (NYSE:CXW) now expects it's fiscal 2022 FFO per diluted share to stand around $1.55 to $1.70.

The number of long hedge fund bets has been increasing in CoreCivic, Inc. (NYSE:CXW) over the past three straight quarters. Of the 924 elite funds tracked by Insider Monkey, CoreCivic, Inc. (NYSE:CXW) was in 16 portfolios as of December 2021. Unlike Bristol-Myers Squibb (NYSE:BMY), Fidelity National Financial, Inc. (NYSE:FNF), and General Dynamics Corporation (NYSE:GD), CoreCivic, Inc. (NYSE:CXW) was unable to sustain its dividends. The company suspended its dividends in 2020 due to a debt load.

5. The GEO Group, Inc. (NYSE:GEO)

Scion Asset Management’s Stake Value: $6.5 million

Percentage of Scion Asset Management’s Portfolio: 8.84%

Numbers of Hedge Fund Holders: 16

Michael Burry’s Scion Asset Management has been reducing its stake in The GEO Group, Inc. (NYSE:GEO) over the past two consecutive quarters. The firm held 850,000 shares of the company as of the end of the December quarter. The GEO Group, Inc. (NYSE:GEO) is the closest competitor of CoreCivic, Inc. (NYSE:CXW). However, its shares have been tumbling at a faster pace than the broader market. The stock price of The GEO Group, Inc. (NYSE:GEO) is down around 27% since the beginning of this year, extending the five-year downtrend to 80%. Despite a share price decline, Wall Street analysts look optimistic over the future upside potential with a median price target of $15, up significantly from the current price of around $6 a share.

Recently, Moody’s slashed GEO Group’s ratings including senior unsecured debt rating and corporate family ratings to Caa1 from B2. Its senior secured credit facility was also downgraded to B3 from B1. At the same time, the rating outlook was revised from stable to negative. On the other hand, The GEO Group, Inc. (NYSE:GEO) is focused on using its free cash flow for debt reduction. Moreover, the company is reviewing potential sales of its assets and businesses to enhance its cash position. CoreCivic, Inc. (NYSE:CXW) has also been successfully implementing this policy to improve its cash position and strengthen its balance sheet. The GEO Group, Inc. (NYSE:GEO) ended 2021 with $506 million of cash on hand and $2.1 billion in net recourse debt outstanding.

The number of long hedge fund positions was at 16 as of December, flat compared to the previous quarter, according to data tracked by Insider Monkey. Arrowstreet Capital and Intrinsic Edge Capital were among the leading stakeholders in the company.

4. AEA-Bridges Impact Corp. (NYSE:IMPX)

Scion Asset Management’s Stake Value: $9.9 million

Percentage of Scion Asset Management’s Portfolio: 13.41%

Numbers of Hedge Fund Holders: 30

Like Bristol-Myers Squibb (NYSE:BMY), Fidelity National Financial, Inc. (NYSE:FNF), and General Dynamics Corporation (NYSE:GD), the 'Big Short' Michael Burry initiated a brand new position in AEA-Bridges Impact Corp. (NYSE:IMPX) during the fourth quarter of 2021. It is a special purpose acquisition company, or SPAC. The shares of AEA-Bridges Impact Corp. (NYSE:IMPX) had made huge swings in December after it announced to merge LiveWire, the electric motorcycle division of Harley-Davidson (HOG). As of result of the transaction, LiveWire will become a separate publicly traded company. LiveWire will utilize the $545 million in net proceeds from the transaction to accelerate its go-to-market model, enhance global manufacturing and distribution capabilities and invest in new product development.

AEA-Bridges Impact Corp. (NYSE:IMPX) was in 30 hedge funds’ portfolios as of December. Fort Baker Capital Management and Marshall Wace LLP were among the leading stakeholders in the company. Michael Burry held around 1 million shares of AEA-Bridges Impact Corp. (NYSE:IMPX) as of December, accounting for 13.41% of the overall portfolio.

Click to continue reading and see Michael Burry's Top 3 Stock Picks.

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Disclosure: None. Michael Burry's Warning On Inflation and His Top 6 Stock Picks is originally published on Insider Monkey.