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Michael Burry's 3 Favorite Stocks Right Now

Michael Burry made a name for himself during the financial crisis. His hedge fund, Scion Capital, which he founded in 2000 and had the backing of Joel Greenblatt (Trades, Portfolio), recorded cumulative net returns of 489.3% between November 2000 and June 2008.

However, Burry found that running a hedge fund was not the lifestyle he wanted, and decided to exit the industry in June 2008.

After a five-year absence, he reopened his hedge fund in 2013 under the name Scion Asset Management. Between 2013 and the beginning of 2019, we only received four limited glimpses into Burry's portfolio. Scion only filed 13Fs with the Securities and Exchange Commission (required for any manager managing more than $100 million in assets) in the fourth quarter of 2015 through the third quarter of 2016.

Burry's favorite stocks

Scion started filing with the SEC again this year, presumably because assets under management had recovered to the $100 million threshold after declining toward the end of 2016.

The firm's second-quarter 13F gives us an exciting insight into the stocks Burry is interested in right now.

The largest holding in the portfolio at the end of the second quarter was Western Digital Corp. (NASDAQ:WDC). Scion owned 250,000 shares at the end of the reporting period, giving a value of $11.9 million. The total value of holdings in the portfolio at the end of the quarter was just under $94 million, and Scion reported a total of $263 million in assets under management.

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The second-largest holding in the portfolio at the end of the reporting period was Cleveland Cliffs Inc. (NYSE:CLF).

Scion owned 1.1 million shares of the company at the end of June with a value of $11.8 million. The third-largest holding, making up $10.7 million in assets under management, was Tailored Brands Inc. (NYSE:TLRD).

In total, these three holdings made up 37% of Scion's total equity portfolio. However, I should point out 13Fs only detail equity holdings and do not give us any insight into cash or debt investments.

Of the three companies, Cleveland Cliffs seems to be the most attractive. At the time of writing, shares of the iron ore miner are trading at a forward price-earnings ratio of just 4.8 and support a dividend yield of 2.9%.

Over the past five years, the company has been through a drastic restructuring. Rising costs and falling iron ore prices forced Cleveland Cliffs to book a $7.2 billion loss in 2014. Since then, management has managed to stem losses and return the company to profitability.

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Last year, it reported a net income of $1.1 billion. Wall Street analysts are forecasting income of $502 million this year. After eliminating its dividend in 2014, Cleveland Cliffs restarted the payout last year after cutting debt in half and returning to profit.

Tailored Bands (the holding company of Men's Wearhouse) is cheaper than Cleveland Cliffs, but the company's weak balance sheet is concerning. At the end of fiscal 2019, shareholder equity was just $3.6 million, against $1.1 billion in debt. Management is taking action to try and bring debt under control. It recently agreed to the sale of its corporate apparel business for $62 million in cash, which the market seemed to like.

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At the time of writing, shares are trading at a forward price-earnings ratio of just 2.7. Wall Street analysts have the stock yielding 15.4% this year, which considering the high debt load, seems optimistic. One bright spot is the company's cash flow. It is currently dealing at an extremely attractive price to free cash flow ratio of 2.

Western Digital is the most expensive of the three top holdings. It is trading at 18 times forward earnings, though Wall Street analysts expect earnings growth to take the stock down to a forward price-earnings ratio of 7.8 next year.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.