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I know it's always the same story: the guy who correctly predicted the financial crash back then, Michael Berry, is warning of bad times again. And you do n't have to agree with everything Berry says, but you have to acknowledge that he outperformed almost all other investors, even before and after the financial crash.
Today, we want to better understand how and, above all, why Michael Berry acts, so we can draw our own conclusions. Just because Michael Berry says jump out of the window does n't mean everyone should jump out of the building. But perhaps we should re-examine our own opinions and expectations for the future.
And as soon as we look at his investment portfolio, we'll see what kind of companies his money is actually invested in, assuming the economy continues to face difficult times. There are some surprising stocks in there. So, after looking at Mike Wilson's expectations for 2023 last week, and Stanley from tomorrow, today we're looking at Michael Berry.
They both belong, to put it cautiously, to the pessimists, but with good reason. In the next video, there will be some balm for the soul for all Andhold investors. Included before we look at my investment plan for 2023 in the final video of this series: there's nothing to buy from me, however, I'd like to celebrate reaching 10,000 subscribers soon with a warm beer and I appreciate every supporter on this mission.
Today we'll explain again who Michael Berry actually is, examine his performance in recent years, and what kind of investment strategy you actually follow. Then we'll get to the central aspect of this video: his economic outlook for 2023. I'll do my best to make everything as understandable as possible, and finally, we'll look at his sometimes surprising investments that we can deduce from his economic forecast.
Let's not waste any time, let's get started. We're back to Michael Berry, and why should you care? Most of you probably don't know Michael Berry from some magazine, but from a movie, namely "The Big Short," in which he's played by Christian Bale. The film tells the true story of how Michael Berry deliberately bought so-called "creativity falls" two years prior, betting on the collapse of the American housing market.
He 's not one of those crash prophets who... Every year after a new crash, he buys in until it finally comes, and this can be relatively easily demonstrated by his performance before and after the financial crisis. Let's look at that in a moment. Incidentally, not only Michael Berry himself but all the investors of his then hedge fund benefited from this correct prediction.
He closed this hedge fund in 2008, directly after the financial crisis. You can't imagine, even though Michael Berry brought millions to his investors and himself, some were still very angry with him. I would have preferred to be happy about the money, but you just can't please some people. In any case, Michael Berry took a short break before reopening it in 2013 with a slightly modified name.
Now it's called Cyon Asset Management, and he still holds his private fortune, estimated at 200 to 300 million US dollars, there. And we're all lucky. Every American investment company with over 100 million US dollars in capital must report all its investment activities every quarter, with a slight time lag.
He also discloses this information to us private investors, so we see all his stock purchases and sales, which we will use to our advantage later when we look at his investments. And so that Michael Berry is hopefully no longer labeled a one-hit wonder, at least in my commentary, let's take a quick look at his performance.
It's really, really good. To be fair, it must be said that this performance only includes his long positions, as short positions don't have to be reported. Nevertheless, the whole thing is impressive, and very few should have managed to perform better than very well. Just for comparison, here is the performance of Warren Buffett, which was slightly better than the S&P 500 but still lags considerably behind Berry's.
This raises the question of how he actually invests. So let's look at his investment strategy. Mike Berry invests in companies that, in his view, offer almost outrageous value. These are companies that are often misunderstood and companies that no one dares to look at, but which, for him, offer a great merger of safety.
In short, he looks for companies that appear to be roadkill and then sells them when they recover a little. Incidentally, companies that have been hyped up and polished are exactly the kind that I'll show you later. He's currently invested in these companies, and he likes to jump in and out of positions.
This means he doesn't just buy a company once and hold onto it for 10 or 20 years. Instead, he might buy shares in one period, sell them in the next, and then buy and sell them again. To give you an idea, here are a few examples: He bought 21 shares of General Dynamics in the fourth quarter and sold them again the following period.
He bought 21 shares of Bürste Meyer Skript in the fourth quarter and sold them two quarters later. He bought shares of Cosseweg in the same period, sold them, and has just bought them again. He sold shares of Geo Group two quarters later and has now even increased his position. Personally, I think that's way too much trading, but that's his investment style.
Just so you understand, Barry's investment style is a classic longshot strategy. This means he's normally long-invested in mature companies, but also in a number of companies, or even indices, sometimes even with leverage. Or, more often than not, it 's currently only $41 million, whereas two quarters ago it was almost four times as much at $165 million, and we can assume that there's significantly more money in his investment fund.
This means he's currently very pessimistic, which makes it all the more interesting to see which companies he still believes in. We'll look at that in a moment, but first, let's look at the basis for all his investments: his opinion, his economic outlook for the coming year. Michael Berry is n't exactly known for being a perpetual optimist, but I think we should listen to him, even if we don't have to take everything he says at face value.
He's been extremely right in the past and is extremely successful himself, so I think it's simply unwise not to incorporate that into his own opinion. Whether the market rises or falls in the coming year, or goes in circles, because ultimately nobody knows, and honestly, we still try to understand what's going on.
On January 2nd, Michael Berry tweeted a tweet that perfectly summarized his current position, even if some explanation is necessary to fully understand it. He wrote... Inflation has peaked, but it's not the peak of this cycle. We'll see the CPI (Consumer Price Index) even lower, possibly even negative, in the second half of 2023.
Regardless of the definition used, the US will be in a recession. The Federal Reserve will cut interest rates and stimulate the economy, leading to a new inflation peak. That's a very concise summary, and it contains a lot of information. We 'll now go through these points step by step, not only to understand what's actually happening in the economy, but also to understand his position, which is crucial when we look at his investments.
Most of you have probably been hearing about inflation, recession, deflation, whatever, for weeks now, and it's all become a monotonous mess. I want to do my best to provide some clarity, so let's recap the first part: he says inflation has peaked, but it's not the peak of this cycle. We'll see the CPI (Consumer Price Index) even lower, possibly even negative, in the second half of the year.
We'll look at what he means by that in a moment, but to understand the development of inflation, we first need to take a step back. Let's clarify what the CPI actually is, the Consumer Price Index, how it's composed, and how it all influences the stock market. The Consumer Price Index is compiled in the US by the Bureau of Statistics to measure inflation.
The Federal Reserve uses these figures to manage the economy. Nearly 100,000 different prices are collected and measured every month to see if the price level is rising or falling. To get the best possible picture of whether the cost of an average burger is rising or falling, eight categories are examined: housing, clothing, and transportation.
You can see them listed here. Because rent is probably the highest monthly expense for most people, it's weighted more heavily in the Consumer Price Index than, for example, transportation costs. This is what the weighting looked like in September of last year, and we can clearly see that housing is the largest category and is weighted more heavily than transportation, which is found at the bottom.
So it all makes sense. All of this leads to these great graphs that we've probably all seen before. This is the US Consumer Price Index. Germany is in a very similar situation. The graph shows the increase in the price level, or simply inflation. Such a rapidly rising inflation can have an extremely negative impact on economic growth, and that's exactly what we're seeing right now with one company after another.
Growth expectations are being revised downwards due to the high inflation, which then leads to higher interest rates, and this has a major impact on company valuations. This is the perfect segue to the second part of his tweet: regardless of the definition used, the US will be in a recession. The Federal Reserve will lower interest rates again, stimulate the economy, and this will lead to a new inflation peak.
So the whole thing starts all over again, and the first signs look like Michael Berry might actually be right. We just got the inflation figures for December of last year in the US, and inflation has already fallen to six and a half percent, which is a significant drop compared to the previous month and is a positive sign.
If this trend continues to accelerate, the Federal Reserve could indeed lower interest rates again and thus stimulate the economy. So his theory is that the next six months will be pretty bad, but after that... It could just as easily be a 180-degree turn uphill again, so Bruno, let the cat out of the bag: what has Michael Berry invested in?
Last quarter, the story was relatively easy to explain. Barry only had a single, tiny position in one company: Geograph, a private prison operator. Now, he 's added quite a few more, but that doesn't necessarily mean Barry has become much more optimistic. It simply means he's taking a calculated risk by investing in extremely clever companies that have absolutely no impact on the overall economy.
We'll discuss the individual cases in a moment. The first major possibility is his position in Geo Group, which he has significantly increased, and Course Civic. Together, these two positions make up over 50% of his portfolio and both own and operate private prisons, mainly in the USA. His position in Q Rate Retail Group, which mainly operates teleshopping, is also very interesting—a company that 99.9% of all investors would probably immediately disregard.
Aero Jet Rocket Dyn, a classic defense company, is also in his portfolio. They manufacture rocket engines for clients like... The United States Department of Defense, NASA, Boeing, and Login Marten, finally two smaller positions in communications companies, are highly interesting. The reason behind these positions is that I came across some incredibly exciting things that actually have nothing to do with the company and what the company actually does.
Unfortunately, it's impossible to introduce them all to you in terms of time. We'll limit ourselves to a brief summary of Key Raid, take one of the two prison companies, and finally look at Charter Communications, one of the two communications companies. In my opinion, these are the most exciting pictures from his stock portfolio, and I'd like to explain them to you in more detail over the next few minutes.
Let's start with the company that nobody really wants to look at: Q Rate Retail Group. Do you remember when I mentioned earlier regarding his investment strategy that he likes to invest in companies that, in his view, offer almost outrageous Valium and look like Roadkill? I couldn't have imagined a better company.
Q Raid consists of a few different brands, almost all of which are essentially continuous advertising. The target group is women over 60, a customer group that is often completely overlooked but incredibly powerful. It's understandable if you're now wondering, "What on earth is he investing in?" My mountain range, there's a company that runs a constant stream of infomercials, yes, you heard right, and don't worry, it gets even better.
Yes, they produce infomercials, so they sell products via cable television. It's an industry practically on the brink of collapse with a truly complicated corporate structure, and get this: 6.5 billion US dollars in debt, even though the company is only worth about 800 million US dollars. And all that interest is currently rising at a record pace, and we might be facing a prolonged recession.
Oh, and I forgot one more thing: yes, their largest and most important fulfillment center in the USA burned down last year. So everything is working against this company. Yes, exactly, and this is the company that Michael Berry has now invested in. And I'll explain why: the company is priced as if it's on the brink of being baptized by God, but that's simply not true.
In fact, despite 6.5 billion US dollars in debt, a large portion of the debt isn't due until after 2030, and the interest rates they honestly pay are fixed between 5.1 and 5.4 %. Here we have the company's operating income (shown in light blue) compared to the annual interest payments over the last five years.
This is all still within a manageable range, and revenues have remained stable despite everything. It's a highly complex company, but with a lot of work, an exciting investment case might emerge. And who knows, maybe they'll develop similarly to how they did after the financial crisis of 2829. Now we come to the next, somewhat unusual investment opportunity: Civic.
Besides the Geograph Group, which we looked at in the last video about Michael Berry, Core Civic is one of the largest companies worldwide that owns and operates private prisons. Just last time we looked at Geograph, I overlooked one thing that would be the main reason for an investment. I'll tell you about it in a moment.
Private prisons are certainly not the most pleasant business one would want to be involved in, but I don't want to judge. Are companies like Nestlé, Coca-Cola, and Apple really that much better? I have no idea. The 60 facilities they operate, 44 of which they own, all have more staff per inmate and are decades more modern than state prisons.
Furthermore, they decide in In the US, the courts decide what kind of punishment someone receives, not the companies. 8.7 times free cash flow for a company with historically stable profits isn't necessarily expensive, but that's not the investment case at all. The real investment case, no kidding, lies in the fact that the American president wants to reduce the number of private prisons.
At first glance, one might think that this is a bad thing. However, many state prisons will soon need to be replaced because they are getting old or need renovation. At the same time, no new ones have been built for years, or only very few. What does this mean for Coins Civic? For Call Civic, it means that their current contracts with the government are extremely secure.
Perhaps they can even raise prices because they are in a significantly better negotiating position. Or they can sell their prisons to the state, and that's quite exciting. Recently, they sold their facilities with 1987 beds for just 130 million US dollars. That's the equivalent of 65,723 US dollars per bed.
If you use that as a benchmark to evaluate the rest of their portfolio, you would expect... A value of nearly 4.6 billion US dollars, or 30 dollars per share, is expected. The stock is currently at 11 dollars. Assuming these other valuations are realistic and the last sale wasn't significantly overpriced, one could say that you're getting a company here at a fairly fair multiple below liquidation value.
That's not bad at all. Finally, let's talk about Charter Communications. The stock has fallen significantly recently, which has attracted a number of well-known investors. Besides Michael Berry, for example, others are also on board. Perhaps we should start with what a communications company actually does and how Charter Communications actually makes money.
Their business is divided into cable television, broadband internet, and mobile phone contracts. Cable television generates a lot of revenue but is relatively small and is currently in decline worldwide. However, this isn't necessarily a bad thing. Customers who didn't have cable use almost twice as much broadband internet, which is a growing business segment with a fairly high margin.
They offer mobile phone contracts quite cheaply by buying capacity from Horizon. This way, they do n't have to finance the expensive 5G rollout themselves, and they can offer this service exclusively to their customers who also use their other services. Offering low prices, even if they do n't make money with that business segment, reduces costs and creates satisfied customers.
But that's not why Michael Berry finds this company exciting. He finds it exciting for a different reason. One could argue that the internet nowadays falls into the same category as electricity and water. It's an extremely predictable business, which makes it ideal for... one might almost think... Charter Communications is worth 60 billion and has 95 billion in debt.
Not quite as bad as the Retail Group, but still pretty drastic. That would be another reason for investors to steer clear of this company. That 's all fine if you don't want to dwell on it. However, the company chose to take on this debt itself. It didn't happen because they were in trouble or anything like that.
Charter Communications is highly profitable. The reason why it makes so much sense for them to take on debt is the extremely good predictability of their stable profits. It simply makes more sense from a shareholder perspective if they use their cash flows to buy back their own shares instead of paying off the low-interest debt in the last five Years ago, they bought back half of all shares, and what's the best thing to do during high inflation?
Of course, have high debt that you only have to pay back sometime in the future after you've passed the inflation on to your customers. And that's exactly what they did: price increases that customers accepted because all the competitors also had to raise their prices. And nobody can do without the internet.
The debt, because it's fixed, didn't increase further, so they can pay it back much more easily in the future. At least that's the idea behind it. The investment theory is n't quite that simple, though. The next video will be a bit more positive. I'm already looking forward to it with Charlie Manga.
So that's it from Michael Berry and me. Please subscribe if you liked it, and see you in the next video. Until then, take care.
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