Burry's Big Bet On A Dying Industry: a new portfolio holding 🎶
There are a few things in life better than identifying an undervalued and out of favor stock, investing in the security and flipping it for a double-digit percentage profit when mean reversion kicks in. This is the epitome of deep value investing and how I have been making money as a full-time investor for almost a decade.
The formula for a deep value investor is rather simple.
Identify an industry that is beaten down and so hated that almost no one wants to invest in it.
Do deep fundamental research on the industry to figure out which companies within this sector can continue generating meaningful free cash flows.
Perform a full valuation analysis to figure out what downside is for the industry/companies in the industry.
Buy the industry in size.
Wait for a mean reversion event or catalyst that sends the share price higher. This can include but not limited to more cash flows generated than anticipated, the market realizing things are not quite as bad, some sort of management event (repurchases, dividends, cash out refinance of assets), etc.
Flip for a profit. Rinse, wash and repeat.
This is essentially the core the Michael Burry’s strategy. Find cheap stocks, wait for mean reversion and flip them for a double-digit gain. The strategy works and has turned many enterprising investors into extremely successful portfolio managers.
The stock I am writing about today fits this description of a deep value mean reversion play to the T.
The stock price has collapsed over 60% in the past year on fears of a slowdown in the advertising market.
There is significant debt at the corporate level which has resulted in the stock trading at essentially an equity stub value. The market cap is only $450 million, and the enterprise value is $5.5 billion.
Following the stock price collapse, bond prices at the corporate level have dropped to record lows and the management team is using all excess free cash flow to buy out debt substantially under par value.
Management guidance implies the company will generate $1 billion of annualized EBITDA with substantially all free cash flow to pay down debt. EV/EBITDA of 5.5x is not aggressive here and assumes full value of debt when the company is buying it back in size under par value.
2024 could be the mean reversion year as political revenue will come back in full swing. Political revenue for advertising businesses is almost 90% incremental to the bottom line and will convert directly into free cash flow.
Finally, insiders of this company have purchased millions of dollars of stock in the open market, while the company is trading at basement level valuations.
I have been following this company for years. It was owned by legendary investor and businessman John Malone in the past. The company operates in a “dying” sector and tends to get blown out every few years to basement level valuations. Eventually the market realizes the industry isn’t really debt and the stock tends to fly. Now Michael Burry owns the stock and given the above thesis I laid out; the valuation looks extremely compelling.
Lets’ dig in…
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