Last week, fund managers of a certain size disclosed their stock holdings for the third quarter ending on Sept. 30. Fund managers are required to do this 45 days after the close of each quarter in a 13F form filed with the Securities and Exchange Commission (SEC). Professional investors have years if not decades of experience so they have been through different markets and cycles. They also likely have the returns to back it up. One investor who filed their 13F form is Michael Burry of Scion Asset Management. Burry is a famous contrarian investor who correctly called the housing downturn of 2008. Now, he's piling into a group of stocks that may not perform well under a Trump administration. Is the contrarian investor onto something?
Burry was a "big short" during the Great Recession
Burry was always poised to be an accomplished individual. He almost became a neurosurgeon. He was pre-med at the University of California, Los Angeles, and then got his MD from Vanderbilt. He started his residency at the Stanford University Medical Center but did not finish because his investing hobby quickly became a full-time job.
Burry posted his investment ideas online and quickly became a must-follow in the early days of the internet. He is typically a value investor and tries to find stocks trading below their intrinsic value. Burry eventually left Stanford to launch his own Hedge Fund, Scion Capital, which found early success. A few years before the Great Recession, Burry dug into the subprime mortgage market, believing the boom was unsustainable and that the bubble would soon collapse. He took bets on his thesis by getting major Wall Street banks to sell him credit default swaps on mortgage bonds.
While his thesis took a while to play out, Burry would eventually score hundreds of millions in profits. Burry supposedly made $100 million for himself and $700 million for his investors. The movie The Big Short portrays the story of Burry and others who shorted the housing market leading up to the Great Recession. Oscar-winner Christian Bale plays Burry in the movie.
Trump's potential tariffs could be bad for Chinese stocks
Today, Burry runs his own fund called Scion Asset Management, which only owns eight stocks. In the third quarter, Scion significantly increased its position in several Chinese stocks that he already owned coming into the quarter:
- JD.com (JD -3.18%): Burry doubled his stake in the large Chinese e-commerce giant to 500,000 shares for a total value of roughly $20 million.
- Baidu (BIDU -1.87%): Burry increased his stake by 67% in the artificial intelligence and search engine company and now owns 125,000 shares valued at roughly $13.2 million.
- Alibaba (BABA -1.19%): Burry also increased his stake in another large Chinese e-commerce giant by 29% and now owns 200,000 shares valued at more than $21 million.
Before the election, Chinese stocks surged as the government implemented stimulus initiatives many investors believed would awaken the Chinese economy. Many Chinese stocks have strong earnings growth but don't trade at nearly the same valuations as growth and tech stocks in the U.S. The sector can be difficult to navigate due to the Chinese government's influence, and China's economy, which has struggled this year.
However, the rally has stalled since Election Day as investors grow worried about President-elect Donald Trump's administration and potential tariffs on Chinese imports that could be as high as 60%, according to Trump.
It's worth noting that Burry purchased additional shares in these stocks before knowing the election's outcome. He also purchased a significant amount of put options on these three Chinese stocks, setting up what could be a protective put trading strategy. Buying put options typically leads to profits when a stock goes down but when paired with a long position as a protective put, the strategy is bullish overall.
Burry likely knew that a Trump victory was possible. He might also think the impact of tariffs will be tough at first but that the market will digest them over time, or that Trump may not actually impose tariffs as high as 60%. Either way, Burry is one of the greats, so his positions should be taken seriously. JD.com, Alibaba, and Baidu have significant potential but the road could be rocky in the near term so be prepared for volatility if you decide to invest.
