In case you missed it, one of the most-anticipated data dumps of the fourth quarter occurred last week on Nov. 14 -- and no, it has nothing to do with earnings season or the release of the October inflation report.
No later than 45 days following the end to a quarter, institutional investors with $100 million (or more) in assets under management are required to file Form 13F with the Securities and Exchange Commission. A 13F allows investors to look over the shoulders of Wall Street's top money managers to see which stocks they purchased and sold in the most recent quarter (i.e., the third quarter).
Although Berkshire Hathaway CEO Warren Buffett tends to garner a lot of attention, he's far from the only asset manager who's made their mark on Wall Street. Another 13F that's of high interest to investors is that of Scion Asset Management's Dr. Michael Burry.
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The "Big Short" investor laid his claim to fame through contrarian thinking
It's a well-known fact that Wall Street's major stock indexes have increased in value over the long run. Even though stock corrections, bear markets, and crashes are a normal and inevitable aspect of the investing cycle, the long-term growth of the American economy and corporate profits eventually lifts Wall Street's iconic indexes to new heights.
Nevertheless, there are opportunities for short-sellers to generate meaningful profits over shorter timelines. A short-seller makes money when the price of a security declines, and loses money when it rises. Whereas gains are capped at 100% for short-sellers (i.e., a publicly traded company's share price can't fall below $0), losses are, in theory, unlimited.
Burry gained notoriety for being in this contrarian camp during the financial crisis from 2007 through 2009. In fact, his story is documented in the 2015 film The Big Short, as well as the 2010 novel by Michael Lewis, The Big Short: Inside the Doomsday Machine.
Prior to the (in hindsight) collapse of the housing market, Burry questioned the health of mortgages that had been packaged into larger mortgage-backed securities (MBSs) by many of America's biggest financial institutions. With his fund (Scion), Burry purchased credit-default swaps on these MBSs and effectively bet on their default. When the dust cleared, Scion walked away with a profit totaling around $725 million.
Since accurately calling this event, Burry has been known as Wall Street "Big Short" investor.
But interestingly enough, it's not pessimism that stands out in Scion Asset Management's latest 13F. Rather, it's the three market-leading businesses Burry has been piling into that share a common theme.
Image source: Getty Images.
Michael Burry looks overseas for incredible deals
With the stock market at one of its priciest valuation multiples in more than 150 years, according to the S&P 500's Shiller price-to-earnings ratio, it's perhaps not surprising that Burry chose to purchase shares of three historically cheap, industry-leading businesses based in China.
Scion's 13F shows that Burry bought:
- 250,000 shares of China's No. 2 e-commerce player JD.com (JD -3.18%), which exactly doubled his fund's stake from June 30.
- 50,000 shares of China's leading internet search engine Baidu (BIDU -1.87%), which increased his fund's stake by 66.7% from the midpoint of 2024
- 45,000 shares of China's leading e-commerce company and cloud infrastructure service platform Alibaba (BABA -1.19%), which increased his fund's position by 29% from the June-ended quarter.
Although China's growth rate has lagged its historic norm following the COVID-19 pandemic, the biggest potential red flag of investing in the world's No. 2 economy is the unpredictability of its regulators. The tight grip of China's government on domestic businesses tends to lead a valuation discount, when compared to U.S.-based businesses in similar industries.
But for those investors with an appetite for a little extra risk and a potentially amazing deal amid a very pricey U.S. stock market, China stocks might be worthwhile.
Baidu, for example, has accounted for between a 50% and 85% monthly share of internet search in China, dating back more than a decade. As the preferred internet search engine in China, Baidu should have no trouble commanding strong ad pricing power from businesses wanting to reach domestic consumers.
Meanwhile, Alibaba and JD should benefit from China's burgeoning middle class. Though online retail sales growth has matured in the U.S., it's still relatively early in its growth cycle in the world's No. 2 economy.
It should be noted that while Alibaba and JD are the respective No. 1 and 2 in e-commerce market share, the two companies have different operating approaches. Alibaba generates a lot of its revenue as a third-party marketplace. By comparison, JD operates more like Amazon and controls the inventory and logistics that follow an online order.
All three companies offer quite the treasure chest, as well. Alibaba ended the September quarter with approximately $57 billion in net-cash, which includes restricted cash. Meanwhile, JD is sitting on a little over $30 billion in net cash, including restricted cash and marketable securities, as of the end of September. Lastly, Baidu has $18.3 billion in net cash, inclusive of restricted cash and long-term investments, as of the end of June. A hefty cash position allows for acquisitions, ongoing innovation, and often a robust capital-return program.
Whereas the benchmark S&P 500 has a historically high forward price-to-earnings (P/E) ratio of almost 25, shares of JD, Baidu, and Alibaba can be scooped up right now by opportunistic investors for respective forward-year multiples of 8.2, 7.7, and 9.1. For contrarian investors (and Scion's Michael Burry), all three China-based stocks offer a favorable risk-versus-reward profile.
