Welcome to Weekly Briefing #4 from the Unexpected Value newsletter.
In this section I provide a recap of some of the best investment ideas that I’ve come across and give some thoughts on the overall market.
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Michael Burry Tells It How It Is
Michael Burry’s Twitter profile is named Cassandra. If you’re wondering why, Cassandra comes from Greek mythology. She was a trojan priestess whose curse was to share true prophecies that no-one believed.
Burry, who made $700 million from the credit crisis, has made a lot of good calls recently and was an early investor in GameStop. Last week, he laid out his views on Twitter very clearly. According to Burry, we are living in the greatest speculative bubble of all time. Burry later deleted his tweets which has become something of a theme for the investor.
Burry also has strong views on bitcoin and cryptocurrencies. His latest tweets suggest that he views bitcoin negatively. He indicated that bitcoin is in a classic head and shoulders pattern. He said the problem with cryptocurrencies is the amount of leverage in the system.
The problem with crypto, as in most things is the leverage. If you don’t know how much leverage is in crypto, you don’t know anything about crypto, no matter how much else you think you know.
~ Michael Burry on Twitter
Despite the bearish commentary, Burry did admit there are some opportunities in the market, but they are in small and lesser known companies. These are companies that major funds often can’t buy due to their size or regulatory constraints.
Michael Burry’s Portfolio
If we take a look at Michael Burry’s hedge fund Scion Asset Management you can see that he is largely backing his convictions. SEC 13F filings show Burry has various bearish and inflationary focussed trades.
As reported by Whale Wisdom, Burry’s fund has a huge short position in Tesla which makes up 40% of the portfolio. He is also bearish on Treasury bonds with a 12.7% short position in TLT puts and a 4% call position in TBT. He’s also got a short trade on the Russell 2000 Growth ETF (IWO) with a position that makes up around 3% of his holdings.
Balancing out those bearish trades, Burry has long positions in Google, Facebook, Kraft Heinz, CVS and NTAP and a number of other smaller longs.
Burry’s trades can change at any time and these filings may not reflect all his real positions. However, it’s clear what Burry’s general outlook is for the market.
Michael Burry’s Tesla Short
Burry’s Tesla short is not a new position but one that he has held since around December 2020. We don’t know the strike prices but according to latest filings, his Tesla short now amounts to a market value of ~$534 million.
Burry has tweeted in the past that Tesla’s positive net income was enabled by the sale of hundreds of millions of regulatory credits. He became skeptical of the valuation in September last year, apparently exiting when the stock had a valuation around ~$458 billion.
Since then, Tesla’s market cap has soared to $600 billion and Burry has grown his short position. Burry wrote:
“Chinese regulators summon Tesla on quality issues as consumers complain about quality … but $TSLA bought $BTC. In my mind’s eye, so much #digitalconfetti.”
Burry also noted:
“$TSLA and $BTC correlation coefficient is 0.951967 over the last six months. @elonmusk going for perfect unity? Nah, Elon dreams the impossible. He is determined to break unity. Correlation > 1. And he has history on his side. $TSLA and $BTC investors can make anything happen.”
In other words, Burry believes Musk’s foray into bitcoin is in part to distract investors from some negative news out of China. As we wrote last week, the Model 3 was recently taken over as the best selling car in China by the Wuling Mini EV.
The fact that bitcoin and Tesla have such a strong correlation is not a good thing either. It suggests the same types of investors chasing bitcoin are chasing Tesla and Burry believes both markets are in a bubble.
Our View
Michael Burry has become a legendary investor and it’s always good to hear what he’s thinking. From our own point of view, we cannot disagree that markets are extended and could be in a bubble. All the signs point to an unprecedented level of speculation in markets which has extended to most areas.
With regard to Tesla, we still own a small position and have no intention to short the stock. However, it is certainly one of our smaller trades. There is so much competition in electric vehicles we think the stock may well have topped out at it’s recent high.
We are also not keen on bitcoin or cryptocurrencies at this moment. They may be useful and have potential, but alongside Tesla, these are the areas that are seeing the most speculation from investors.
Always An Opportunity Somewhere
We also believe that there is always an opportunity somewhere. Maybe in Europe, in Asia, or in smaller companies. This is one of the aims of our newsletter. To find opportunities in lesser known and unexpected areas.
It’s for this reason that we will continue our monthly investing process. We will simply be targeting specific areas of the market and do so at a slower pace.
The speculative frenzy just means that we have to be especially careful and we did lighten up on a few of our existing positions last week. We want to have some cash available in case of a market correction. We are not against putting on a hedge though we have not done so yet.
I will now turn to some of the more interesting ideas I came across last week.
Beyond Meat Inc. (BYND)
Billionaire investor Jim Mellon appeared on the Chat With Traders podcast last week. Mellon has a long and varied history in equity markets and became a millionaire by the time he was 28.
Mellon told the podcast that he is extremely bullish on the industry for plant-based food products. This includes meat and dairy alternatives. He said that it’s now possible to produce milk in a lab that is identical to milk produced by cows. As a result, he believes the traditional dairy indusry will be almost wiped out in 10-20 years time.
According to Mellon, the growth of meat and dairy alternatives will be a net positive for society since lab grown food will be cleaner, safer, cheaper and better for the planet. Being less reliant on animals for food will reduce methane and nitrous oxide emissions.
Mellon did not single out any one company that he is betting on to ride this trend. Instead, he’s spread his risk across a selection of 14 different securites that meet his criteria. Some obvious candidates that are available in public markets include Beyond Meat (BYND), Oatly Group (OTLY) and Tattoed Chef Inc. (TTCF). Beyond Meat currently trades at an enterprise value of $9.18 billion.
Jim Mellon has also written a book named Moo’s Law that delves into his thesis.
Pershing Square Tontine Holdings (PSTH)
We commented two weeks ago that Bill Ackman’s decision to buy Universal Music Group may not be as disappointing as first thought and PSTH has since rallied off it’s lows.
Andrew from Yet Another Value Blog put out an excellent article discussing all the merits of the deal. He said that “PSTH represents an absolutely unbelievable risk reward.”
Facebook Inc. (FB)
The Financial Times made a good case for Facebook last week in an article entitled Priced For Imperfection.
Although the company faces regulatory hurdles and some backlash from consumers, the company has a monumental userbase and could be reasonably valued at nine times sales with a PEG ratio of 1.1.
According to the FT:
Markets ignore Facebook’s potential to increase profits even if user growth continues to slow, thanks to its new shopping initiatives. Its Craigslist-like service Marketplace already has one billion visitors each month. This can be used as a springboard for further ecommerce.
It’s worth noting that Facebook owns four of the top 10 apps in the US. Facebook has a userbase of 2.6 billion people yet there are still major opportunities to monetize both marketplace and WhatsApp.
Source: Apptopia
One downside to owning the stock is that 98% of revenue comes from only one source: advertising. If consumers start to turn away from Facebook en masse, the company will lose it’s appeal.
To combat this, Facebook is investigating new tools and payment systems that hope to diversify revenue sources. If Facebook can become a one-stop shop for payments, apps and shopping, then earnings could multiply.
DraftKings Inc. (DKNG)
DraftKings is a digital sports and gaming company that came to market last year in a SPAC. The company rode a tailwind of optimism (centred around the softening of US betting laws) that saw the stock gain 500%.
However, the stock tumbled 11% last week after a short report from Hindenburg Research. Hindenburg claims DraftKing’s merger with SBTech gives the company exposure to black-market gaming, money laundering and organized crime. The report estimates that 50% of SBTech’s revenue comes from areas where gambling is banned.
After the stock took a tumble, several firms came to the defense of DraftKings including Morgan Stanley, Jefferies and Credit Suisse. ARK Invest apparently took advantage of the drop to accumulate almost a million more shares. The stock has now recovered around 7% since the report was released.
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Disclosure/Disclaimer: Of the stocks mentioned we own PSTH, TSLA, GOOG. You can see our portfolio here. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst and does not purport to tell or suggest which securities customers should buy or sell for themselves. The reader agrees to assume all risk resulting from the application of any of the information provided. We strive to provide accurate data and analysis, however, mistakes and errors do occur. Financial investing is risky and not for everyone. You should not bet more than you can afford to lose. Past performance is not indicative of future results.