Michael Burry, the physician and hedge fund manager who rose to fame as a character in Michael Lewis's book "The Big Short" (he was one of a handful of investors who saw the housing market coming and bet against the investment-grade subprime mortgage bonds using credit default swaps), has found his next contrarian call: Going long shares of Gamestop.
Gamestop has consistently ranked among the most-shorted stocks listed in the US. But Burry told Barron's that the market is overly pessimistic over the videogame retailer’s prospects, noting that both Sony's and Microsoft's next-gen consoles are likely to have physical optical disk drives. He also played down the threat from competition by new entrants, including Alphabet's Stadia.
If the next-gen consoles expected to be released next year include optical disk drives, this "is going to extend GameStop’s life significantly," Burry said. "The streaming narrative dovetailing with the cycle is creating a perfect storm where things look terrible. [But] it looks worse than it really is."
Burry noted that 90% of GameStop's ~5,700 stores are FCF positive. In prior console cycles, GS stores saw their FCF tumble before rebounding when the new consoles are released. Burry believes 2019 will mark a bottom for this cycle.
GS shares have slumped ~80%.
He added that much of the selling this year has been driven by technicals, thanks to a change in account rules that increased the company's leverage ratio, though nothing has fundamentally changed.
"Technical factors driving the stock to lows has created an opportunity for substantial buybacks at below private market prices," Burry said.
"There is no better use of capital [than buybacks]."
On Monday, Burry's firm, Scion Asset Management, revealed that it had sent a letter to the board of GameStop, urging the company to finish executing the $237.6 million remaining from its $300 million share-buyback authorization. The letter marks the firm's first foray into activist investing.
"We’re at low tide on the cash balance," Burry said. "The balance sheet checks out for me."
In the statement, Burry also disclosed that Scion now owns 3 million shares of GameStop, or about 3% of the company's shares outstanding.