Michael Burry's Top 4 Stocks at Q1 End Look Like Good Value Now

Michael Burry's hedge fund Scion Asset Management filed its 13F holdings at the end of Q1 (filed on May 16) and showed its top long holdings. Based on the information on Dataroma, the top four long stocks held then were Bristol-Myers Squibb (BMY), Booking Holdings (BKNG), Warner Brothers Discovery (WBD), and Alphabet (GOOG).

Most of these stocks fell during Q2, but now they look like extra good value bargains at today's prices. This article will look at a synopsis of each of them and why they are worth buying now.

Bristol-Myers Squibb (BMY)

During Q2 BMY stock actually rose 5.4% from $73.03 at the end of Q1 and ended June 30 at $77.00. Today, it's $76.10, but it still looks like good value now. Bristol-Myers Squibb is a large-cap biopharmaceutical company. It is developing solutions in a number of areas like hematology, oncology, cardiovascular, immunology, fibrotic, neuroscience, and Covid-19 diseases.

BMY stock is a good play to own during a recession. For example, the average of 21 analysts is 1% earnings growth to $7.58 from $7.51 per share. It is also forecast to rise 6.86% to $8.10 in 2023. This puts BMY stock on a multiple of 10x earnings for this year and 9.38x for next year.

Moreover, the company has plenty of earnings to pay out its $2.16 in dividends annually. At $76.08 on Jul. 6, 2022, BMY stock has a dividend yield of 2.84%, which is close to the average for the S&P 500.

On top of this, Bristol-Myers Squibb has a $5 billion accelerated share repurchase (ASR) program. BMY said it expects to complete the ASR during Q2 and Q3. That works out to $10 billion annually or 6.1% of its market value.

So, including the 2.84% dividend yield, the total return for shareholders in BMY stock is almost 10% annually. That is likely a major reason why Michael Burry has this as his fund’s top holding, representing 13.2% of his fund’s value.

Booking Holdings (BKNG)

This stock was the second-largest holding at 11.36% of Scion's fund's portfolio, according to Dataroma. BKNG fell 25.5% during Q2 from $2,348.45 at the end of Q1 to $1,748.99 on June 30. It will be interesting to see if Burry held on to the stock during the quarter.

One reason he may have done so is Booking Holdings is moving into huge free cash flow (FCF) production. One reason he may have done so is Booking Holdings is moving into huge free cash flow (FCF) production. Earnings are forecast to more than double this year for this online travel and restaurant reservation system to $99.60 per share. But next year, the average forecast of 27 analysts is that it will grow 30.8% next year to $130.31 per share.

That puts this fast-growing stock on a forward price-to-earnings (P/E) ratio of 13.7x on 2023 earnings per share (EPS). Moreover, BKNG produces a large amount of free cash flow (FCF). Last quarter, its FCF was $1.586 billion and the company spent $1.049 billion of it on share buybacks. That means FCF represented a huge portion of its revenue for the quarter. It spent 66% of that FCF on buybacks.

So, assuming analysts’ projections of $20.17 billion in revenue pan out next year, it could end up generating $11.76 billion in FCF if the FCF margin holds up. Let’s say that it averages 50%. That would mean that $10.08 billion in FCF would be thrown off by BNKG.

Therefore, if Booking Holdings spends two-thirds of this $10 billion in FCF on buybacks, it could end up buying back $6.67 billion of its stock in one year. That represents 9.3% of its total stock market value. In three years, that works out to 27.9% of its stock. 

Warner Brothers Discovery (WBD)

WBD was Scion's third-largest holding at 11.32%. It is a spin-off/merger streaming company, which also has a major TV and film studio. Earlier this year, AT&T (T) spun off its Time Warner division, which is the home for HBO and the Warner Brothers TV and film studio, to its shareholders. Then, it simultaneously merged that company with Discovery, Inc., which was already public and houses all of the Discovery reality TV channels.

The resulting public company is now owned 71% by AT&T shareholders and 29% by Discovery shareholders. The company will soon produce its first full quarter as a public company. It took on over $47 billion in debt that was paid to AT&T. This could be a significant drag on its earnings. Moreover, the company is not paying a dividend.

So far, WBD stock is down quite a bit. From $24.62 where it closed on Apr. 10, it was at $14.44 on Jul. 5. This might be expected. Often, spin-off shares do not do well. Moreover, investors want to learn more about the company, so there is a learning process going on. It will be interesting to see if Michael Burry bought more shares as the stock fell, even though it was his fund’s third-largest holding.

Alphabet (GOOG)

Alphabet (GOOG) was Scion's fourth-largest holding and was down 21.68% during Q2 from 2,792.99 at the end of March to $2,187.45 on June 30. However, that makes GOOG stock much more attractive to value investors. Very simply the stock now trades for just 20.5x forecast for 2022 and 17.2x for 2023. 

Alphabet produces a huge amount of free cash flow (FCF) and in the last months, it generated almost $69 billion in FCF. That represents 4.8% of its market value. Typically in the past, the stock had an FCF yield of closer to 3.0%. That implies there could be a significant upside in the stock in the future. If the stock rose to that level its market cap would be $2.3 trillion, or 54% higher. 

Investors may be more interested in the stock after July 15 when the stock goes through a 20 for 1 stock split. That will reduce the price by 95% and increase investors' shares by 20x. It will also make it easier to buy 100 shares that could allow investors to trade in call and put options.

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