Have you heard of the Michael Burry?
Michael Lewis made him relatively famous in his book, “The Big Short.”
The novel was a celebration of Burry and his timely short-selling trade in the middle of the housing boom and then bust.
Burry ultimately made a fortune… but it wasn’t easy.
He was very early on his prediction and was even ridiculed for his courageous trade. But that’s the nature of making prescient calls like he did.
In the case of the housing bubble, the obvious signs including insane loans with no documents pointed to doom.
It was an ever-expanding wave that had to crest at some point according to Burry. Boy did it ever.
The crisis was so bad that some are still crawling out from the rubble today.
Burry is still managing money today looking for opportunities. What does a guru that makes a call like that do for an encore?
Burry sees another bubble brewing, and physics dictates it pop at some point.
Specifically, he is calling out the growing power of “passive investing.”
The amount of money tied into index funds and ETFs right now is astonishing.
Investors around the world are blindly flowing into these stocks without any regard for valuations.
Index funds do not care about the price of the stocks they invest in. They only care about inclusion in the index.
As soon as a stock is included on an index, the fund manager buys the stock no matter the valuation.
Buy, buy, and buy.
That’s what happened in the housing market.
People were given loans with no documents attached, meaning they could just buy, buy, and buy with no regard for price.
In the world of passive investing, some like Burry see opportunity in the coming bubble.
While passive buying has helped propel this raging bull market (now over a decade old), many stocks have been left behind.
In 2019, the discrepancy between the passive index fund winners and those not indexed has been stark.
Specifically, value stocks in the small-cap category have not enjoyed the same bull run as the rest of the market.
According to Burry, some small-cap stocks are so ignored that this is a perfect buying opportunity. At least, that is what he is doing at his money management firm today.
These stocks are criminally undervalued in the current environment.
At some point, the passive world is going to receive a market comeuppance of some magnitude. But betting on that outcome like Burry did in the housing market with his big short is extremely risky.
Instead, a better play may be to exploit the arbitrage between stocks in the passive world and the wide array of ignored small-cap stocks.
Of course, we turned to the Money Morning Stock VQScore™ system to pinpoint the best stocks to do this.
The strong fundamental approach of the VQScore ensures you’re investing in well-run companies with promise, instead of taking a flyer on company going the wrong direction.
And of all the small-cap stocks to buy today, this one stands out…
Michael Burry Is Targeting Small Caps – Here’s Money Morning’s Favorite
Medical software company Allscripts Healthcare Solutions Inc. (NASDAQ: MDRX) has been ignored by the passive investing crowd for some time.
In the last year, shares are down more than 30%.
When analyzing stocks that are bought by passive investors, valuations are insanely high.
In fact, the fundamentals are backwards.
Shares of stocks in passive portfolios tend to trade for earnings multiples that greatly exceed their growth rate.
That is not the case for Allscripts.
Shares of Allscripts trade for just 12 times current year expected earnings.
Analysts expect profits at Allscripts to grow by 13% in the next year.
Most stocks in the market today, thanks to indiscriminate buying of the passive investors, trade for much higher valuations.
A fairly market-neutral 15 times earnings multiple on Allscripts puts the stock at close to $11 per share.
It might not seem like much, but that would give an investor today a gain of more than 20% on their investment.
Allscripts being a software company in the healthcare space is positioned to benefit greatly from current trends and demographics.
And shares won’t get pummeled if the passive market collapses.
The valuation is already too low in my opinion for there to be much downside.
Burry is right. The passive investing strategy is a bubble waiting to pop.
Instead of making a call on when that might happen, try buying a stock like Allscripts that has been ignored by passive investors.
— Jamie Dlugosch
Source: Money Morning