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- Michael Burry snapped up a bunch of energy and shipping stocks in the second quarter.
- The "Big Short" investor was likely drawn to their cheapness and upside potential, one analyst said.
- Burry also made a "very large," leveraged bet against the S&P 500 and Nasdaq-100, the analyst noted.
Michael Burry didn't just bet against the S&P 500 and Nasdaq-100 last quarter, he also loaded up on energy and shipping stocks. Those purchases make perfect sense for the investor of "The Big Short" fame, one leading analyst says.
Burry's Scion Asset Management bought shares of Vital Energy, Precision Drilling, Costamare, Safe Bulkers, and six other companies in the oil-and-gas and shipping industries, a Securities and Exchange Commission filing revealed this week. The 10 positions, out of 33 total holdings, were worth a combined $29 million at the end of June — more than a quarter of the entire value of Scion's portfolio, excluding options.
The fund manager's purchases were most likely contrarian, asymmetric wagers, Gerry Fowler, UBS' head of European equity strategy and global derivative strategy, told Insider.
The energy and shipping sectors are home to "pretty cheap companies trading on pretty trough earnings," he said, adding that Burry was probably "looking for things where he could make five times what he could lose."
Energy companies were in bad shape a few months ago, following a sustained decline in oil prices. Burry may have foreseen a recovery as several major tailwinds materialized in June, including OPEC production cuts, a surprisingly resilient global economy, and the conclusion of the US Strategic Petroleum Reserve's oil sales, Fowler said.
"We're not as smart as Michael Burry," Fowler joked, but even his team expected oil prices to rise and energy stocks to rally against that backdrop.
As for the shipping stocks, Burry may have piled into them because they were extremely cheap. Profits in the sector have come under pressure, as the pandemic boom in goods buying has waned.
Beaten-down stocks can rapidly swing higher, as "any hint of upside momentum" can prompt analysts to revise their earnings forecasts, and the market to reprice the stocks to reflect improved growth prospects, Fowler said.
Burry's purchases of energy and shipping stocks could indicate he's bullish on international trade and a global recovery. However, Fowler cautioned against ascribing that view to Burry given the raft of economic woes around the world, and the fact that Scion held index hedges with a notional value of $1.6 billion on June 30.
"That is a big position even for a big fund," he said, adding that it was an especially large bet in Scion's $111 million portfolio. Even if Burry paid a tiny fraction of $1.6 billion for the hedges, "the exposure he is using shows a significant amount of leverage," Fowler noted.
Burry's energy and shipping wagers might not shed light on his current outlook for stocks or the economy, but they speak to his signature investing style. Specifically, making contrarian, asymmetric bets — like the one against the housing bubble that made him a household name — on deeply undervalued, unfashionable assets.