Renowned investor Michael Burry has taken a short position on Tesla and is aiming for an inflationary environment in the coming years. This puts him in direct opposition to the ‘queen of disruption’, Cathie Wood, who does not expect strong and lasting inflation and continues to bet on hyper-fast growing, disruptive companies.
The facts are now well known: fast-growing technology stocks, often with a disruptive edge, have fallen sharply. This is closely related to the sharp rise in long-term interest rates in the United States. Fast-growing stocks are so-called ‘long-duration’ assets and research shows that they are almost three times more sensitive to changes in long-term interest rates than less fast-growing stocks. Covid-19 had inflated valuations to the point of euphoria and exaggeration. These inflated valuations are now being corrected.
The correction of these high-growth stocks is not so much due to higher inflation (expectations) in the US, which have already risen above 4%, but to multiple contractions caused by these rising long-term interest rates and a natural normalisation of valuations after their parabolic rise in 2020.
The chart below (from Hong Kong investor Puru Saxena) shows this. Some particularly fast-growing companies are seeing their valuation multiples (future enterprise value versus sales) fall sharply.
To be clear: we do not consider US mega-cap technology companies such as Apple, Amazon, Alphabet and Microsoft to be hyper-growth stocks. Rather, we catalogue them in the jargon of fund managers as GARP (growth stocks at a reasonable price) stocks. These shares also have value characteristics.
Indeed, the past few weeks and months have shown that they have announced some implausibly strong results.
Because of their enormous cash flow generation, they can take over smaller companies and buy back their own shares. They are so present in our daily lives that they have taken on the characteristics of a ‘utility company’.
Hypergrowth
Below you can see ARK Investment’s famous Innovation ETF, which has started a steep decline, just bouncing off the 50 per cent Fibonacci level, a key technical support level. It now remains to be seen how this index will develop.
Cathie Wood vs. Michael Burry
Looking at the top ten positions in ARK Investments’ Innovation ETF, we see companies such as Tesla, Teladoc, Roku, Square and Shopify.
What all these companies have in common is that they have delivered huge returns to their shareholders in recent years. Wood was one of the first managers to put forward particularly ambitious targets for the Tesla share. This brought her the scorn of the investment community, but she was proven right.
These companies can be seen as compounders: they bet heavily on the compound growth of their sales, allowing them to ‘buy’, as it were, their future profits. Amazon does this too.
At one point in 2016, Amazon was trading at 150 times earnings. Investors who want to evaluate these stocks should therefore look beyond the price-earnings ratio.
But now Wood’s view is getting competition from a famous shorter, Michael Burry, who in 2008 successfully bet against the US mortgage market, which he said was fraudulent and sick to death, and was proved right. The story was adapted into the fantastic film The Big Short.
He is the founder of Scion Capital, a value-based hedge fund. He recorded a 490 per cent return from November 2000 to June 2008 (some 25 per cent annualised) compared to a cumulative return of -6.5 per cent for the S&P over the same period.
Tesla now has a notorious shorter. Burry took a shot position of $534 million (800,100 shares) in the first quarter of 2021. He already said in February: “my last Big Short got bigger and Bigger and BIGGER”. He recently took Tesla to task over the emission allowances included in the figures.
Inflation
Wood has a macroeconomic view that the current inflationary wave will be temporary. In a recent tweet, she put it as follows:
On this front, too, Burry is diametrically opposed. After all, he bought short positions on long-term US government bonds. He expects long-term interest rates to rise and inflation to rise. Remarkably, he does see value in mega-cap technology companies such as Alphabet and Facebook, on which he bought call options. These companies have strong pricing power.
Conclusion
Burry is not to be underestimated. His vision is very well founded. But Cathie Wood has also made a particularly strong analysis of the disruptive technology companies in her portfolio. Much will depend on which macroeconomic situation we get. If we get back into a disinflationary environment, Wood’s companies will rebound strongly. Inflationary pressures will be favourable for Burry. The jury is still out…