How You Can Reverse Engineer Michael Burry's Latest Buy

When the prominent investing names on Wall Street decide to move, everyday investors will benefit from keeping an ear to the ground, especially when these positions are broadcasted publicly via mandatory 13-F filings.

Remember that guy who called the 2008 recession Dr. Michael Burry? He just cast his vote of confidence by going long Warner Bros. Discovery (NASDAQ: WBD) stock.

Today, the job rhymes with reverse engineering his thinking behind the investment; regarded as one of the most intelligent investors, it would be wise to understand what Burry found of value in this stock and whether markets stand with him on this one to gauge a proper timeline.

Love the Contrarianism 

Michael Burry is fearless of going against public opinion, much less its sentiment. When everyone thought that the mortgage market was the backbone of America, he seemed crazy to be betting on its imminent collapse. Today, there are some on Wall Street teaming up with the investor.

Warner Bros. analyst ratings land on a consensus price target of $20.56 a share, which would require the stock to pop by as much as 88% from today's prices to make this prediction a reality.

The largest shareholder in the company, a little institution named State Street Co. (NYSE: STT), upped its already significant 4.85% stake by as much as 7.7% during the past quarter. Smart money is getting all over this stock for the perfect hunt.

Considering that the stock has been compressed during the past year, underperforming the S&P 500 by more than 20% during the same period, there will probably need to be more profound reasons behind these giants purchasing the stock; otherwise, why bother?

While this may be an overstatement, it is a thesis that could be carried over into an investor's reasoning toolbox. The online streaming and content arena seemed doomed, sure to be overtaken and monopolized by Walt Disney (NYSE: DIS), which is now restructuring to build value in its more traditional segments.

As Disney looks to break up its streaming divisions, already negotiating some sales, there may be renewed hope for those players looking to make their splash in the industry, such as Warner Bros. and their successful HBO Max launch.

There's a Pulse 

While the second quarter 2023 earnings results for Warner Bros were nothing to make you jump out of your seat, there are a few golden nuggets that should be taken away into the value thesis at play.

Revenues were down by 4% over the year, and the company still posted a net loss per share of $0.51. However, free cash flow (operating cash flow minus capital expenditures) rose by 118% during the same period to $1.7 billion. 

This matters to shareholders because, mainly, management can use the free cash flow of the business to tackle some of the most pressing concerns, such as the debt load Warner Bros. has carried in the past.

With HBO Max taking off, bringing 14% revenue growth and breakeven EBITDA (earnings before interest, tax, depreciation, amortization), management is already putting these funds into the right places. 

With $1.6 billion already paid down from outstanding debts, the company seeks to lower its debt ratios to - and below - 4.0x compared to its last twelve months of EBITDA.

This would inevitably bring the company's credit rating to investment grade within a year, a fact that the company lays out in the quarterly presentation.

Considering that the new era of manageable debt is imminent, and the rest of the free cash flow will be outstanding for other activities, it would make sense for management to implement a stock repurchase program amid these contracted valuations.

Another abstract way to think about all this is the company's reported book value, especially the part made up of intangible assets. With successes like HBO Max and the upside opportunity that Disney's retreat is opening, these items could be worth more very soon, primarily as their underlying contents draw more views and revenue.

Suppose you follow this - or other similar - rabbit holes. In that case, you'll realize that perhaps Burry could not resist buying this turnaround name, whose price-to-book value ratio is the lowest since the company's IPO and is bound to go up on these developments.

In any case, those who are willing to take a bit of criticism usually end up taking the cake home. The ingredients are in; the oven is set. Will you consider pushing the button and sharing in Burry's eventual toast?