Michael Burry shorts semiconductor stocks
Plus what are analysts forecasting (for premim subscribers)
Michael Burry is most famous for his aggressive short positions, as immortalized in the movie the Big Short. He has not had the best luck recently, with some of his positions seemingly not paying off. But, a broken clock is right twice a day. And, his positions are always interesting to look at.
Analyst consensus forecasts are also interesting. Premium subscribers can find those at the end of this article.
And so it is that Michael Burry has take a rather bearish position over SOXX, a semi-conductor ETF. The position came in the form of put options, which give him the right to sell SOXX at a pre-determined price at or up until a pre-determined date. He has locked in a sale price and would be hoping that the asset falls in value. This emerged in his latest 13F filings for Scion Asset Management.
I’m going to focus on the SOXX position. But, there were some other interesting positions such as those in Booking holdings, JD.com , and Alibaba.
In the prior 13F filings, he had significant put option positions over SPY and QQQ – two index ETFs that broadly follow the S&P500 and the NASDAQ.
But, now his is betting against semiconductor companies. These companies have done extremely well this year. The SOXX ETF, which Michael burry is betting against, is up 47.44% in 2023 vs 17.56% for the S&P500 or 35.69% for the Nasdaq composite.
So let’s look at Michael Burry’s latest big short and see whether he has made money on it.
The position
The ‘short’ position pertains to put options over the SOXX Semicondutor ETF. A put option gives the holder the right, but not the obligation, to sell the underlying asset at a pre-determined price (called the strike price) at or up until a predetermined date (the expiration date). We do not know the strike price for the option or when it expires. In return for this right, you must pay an option premium.
If you own a put option, you gain when the asset falls and lose when it rises. If the asset falls below the strike price, your payoff is the difference between the strike price and the final value of the asset. Intuitively, you have the right to sell at $10 say, but if the asset falls to $5, you could buy it in the market for $5 and sell it for $10, making a gain. If the asset ends above the strike price, you would not exercise your option and it will expire worthless. You will have lost money because you will have spent money to buy the option, but your payoff was zero.
The put options over SOXX amount to 100,000 units. Each put contract represents 100 shares. Thus, this put position is notionally large, potentially covering 10,000,000 stock units. It has been recorded and reported that this position is worth $47 million. However, that is false. That 47 million simply multiples the price for the SOXX ETF by the number of options. But, in reality, the price per option is much lower and the payoff much different.
SOXX is a semiconductor ETF. Its major holdings include AMD, Nvidia, Broadcom, Intel, Texas Instruments, and Micron. It has 30 major constituents to give some diversified exposure to the sector. Many of these companies have done well this year.
Has this bet paid off?
The answer is probably not given the current data. But, we do not know when the options expire. He entered them during 3Q 2023. We can look at some scenarios to see how he might have done.
During 3Q, SOXX traded between $459 and $533.
Best case scenario is he bought the put options when the SOXX ETF was trading at $533 – the maximum during 3Q. Suppose he were to have then exited the position when SOXX fell to $438 – its lowest in the fourth quarter, he would earn $95 per share unit, for $9535 per option contract, resulting in around $19m in payoff. But, during the fourth quarter, SOXX has also hit $494 and was last trading around $490. Therefore, if he bought the puts when SOXX was at $459 and it increased to $490, he would have lost money.
As indicated, we do not know when the options expire. There is still time for the market to move in his direction. However, it is not clear that will happen, just as it is not clear he gained from the put options over SPY or QQQ.
Will the bet work out?
The next question is whether the bet will work out. I am not entirely convinced. I personally do not see a catalyst for SOXX to nosedive. It could taper. But, it probably needs to do more than taper for the position to be significantly profitable.
CPI inflation came down to 3.2%, suggesting that the Federal Reserve might hike rates less aggressively and in the not too distant future we might move into cuts. This is good news for long duration companies, such as semiconductor companies.
Other positive attributes include the fact that many of these firms generate good cash, even if they are at lofty valuations. This enables them to weather a possible downturn. They sell items that are intrinsically useful, even if demand wanes. The move towards AI is non-negative for these companies, and provides some support.
The valuations for some semiconductor companies are lofty. Nvidia’s P/E is 116. But, it also has strong growth. And, for this to decline by the amount needed, we would need some clear hit to the company’s growth prospects.
Analysts do not appear to expect such a decline, with the mean and median 12 month consensus forecast sitting around 10-11x. Analysts can be incorrect. Information can change over time. However. This suggests that analysts disagree with Michael Burry’s position. And, if inflation moves towards trend, there are no more rate hikes, and there is a soft landing, it is not clear that the market will move in Michael Burry’s direction.