The Big Short/Netflix
- Michael Burry of “The Big Short” laid the groundwork for the GameStop short squeeze.
- The Scion Asset Management boss purchased a stake in the video-game retailer in 2019.
- He also pushed for changes in three letters to GameStop’s bosses.
- Visit Business Insider’s homepage for more stories.
“The Big Short” investor Michael Burry unknowingly lit the spark that ultimately led to the GameStop frenzy last week.
Burry bought a stake in GameStop in 2019 because he determined the stock was undervalued. He penned three letters to the video game retailer’s bosses, urging them to buy back shares and clean up their act.
He couldn’t have imagined his efforts would help to motivate thousands of day traders on a Reddit forum, Wall Street Bets, to orchestrate a short squeeze and boost GameStop shares by as much as 2,500% in a matter of weeks.
The battle between retail investors and short-selling hedge funds over the stock has captured global attention, spurred regulatory investigations, and stoked talk of a financial revolution.
Billionaires such as Mark Cuban and Elon Musk cheered on the upstarts, at least one hedge fund shorting the stock needed a bailout, and overwhelming demand led Robinhood to restrict buying of the stock on its trading platform for several days. GameStop shares promptly crashed and now trade at a fraction of their January high.
Here’s a closer look at how Burry started it all.
Planting the seeds
Burry shot to fame in the early 2010s after author Michael Lewis chronicled his billion-dollar bet against the US housing bubble in “The Big Short,” and Christian Bale portrayed him in the movie adaptation of the book.
The investor kept a pretty low profile after that, as he shifted his focus to betting on water, Asian equities, and small-cap stocks. His Scion Asset Management firm owned about $7 million worth of GameStock stock in late 2018, but sold it in the second quarter of 2019, SEC filings show.
Burry reinvested the following quarter, disclosing 3 million shares worth $17 million. He also wrote to GameStop’s board of directors in late July, questioning their money management and calling on them to buy back another $238 million of their stock to complete the $300 million worth of repurchases they authorized earlier that year.
In his letter, Burry argued that GameStop shareholders have “suffered catastrophic losses for their faith and patience.” He pointed to the steep decline in GameStop’s stock price and huge short interest as evidence that “shareholders do not have faith in current management, and have not been inspired by new leadership.”
Instead of spending money elsewhere, GameStop’s bosses should seize the chance to make a “game-changing share-count reduction,” Burry said. He highlighted that the retailer’s stock price was below $5, it only had about 90 million shares outstanding, and there was massive daily-trading volume.
Given GameStop had $540 million in cash at the last count, he estimated it could buy back around two-thirds of its outstanding stock and still have plenty of money to invest in its business.
Burry described it as an “unprecedented opportunity” to “pull off perhaps the most consequential and shareholder-friendly buyback in stock-market history with elegance and stealth.”
Pushing for changes
Burry wrote to GameStop’s bosses again in mid-August 2019. The company’s stock was trading around $4, meaning its market capitalization was only $290 million or so. Therefore, it could buy back more than 80% of its shares for $238 million, he pointed out.
“The numbers are striking and demand action,” Burry said. A repurchase could “increase earnings per share dramatically – far more than any other possible action on a per-share basis,” he added.
Burry emphasized the fact that reducing GameStop’s outstanding shares would result in “multi-fold greater impact per share for every single other achievement of management.”
For example, if the retailer reduced its share count to 30 million shares and reinstated its $157 million dividend, shareholders would receive a hefty $5.25 per share, he said.
The Scion chief penned a third letter to GameStop’s directors 10 days later, in which he ramped up his criticism of them. He took aim at the company’s acquisitions of Spring Mobile and Simply Mac as part of its efforts to diversify away from video games.
“Back in 2014 and 2015 there were assets and strategies available to GameStop directly within its wheelhouse,” Burry said. “Instead, Amazon and others with more insight took advantage and burglarized GameStop’s wheelhouse while GameStop focused on its de-worsification transformation.”
“The board appears to have fiddled while Rome burned,” he added.
Burry described the $280,000 in annual compensation approved for each of GameStop’s non-executive members as “egregious.” The company had recently laid off 120 employees, and its shareholders had suffered “massive capital destruction” due to board decisions, he said.
The investor suggested the board slash their pay to $140,000 per year. He also questioned whether GameStop’s incentive plan was so generous that it might discourage board members from buying the stock on the open market.
Moreover, Burry called for four of GameStop’s non-executive directors to resign. “GameStop does not need ghosts of the past protecting a legacy of poor capital allocation and thin oversight at this point in time,” he said.
He also suggested the CEO, George Sherman, step down to free up room on the board.
The show begins
Burry’s Scion spent less than $14 million to amass 3.4 million GameStop shares as of April 2020, giving it a 5.3% stake that cost it about $4 a share on average, SEC filings show. The fund gradually reduced its position to 1.7 million GameStop shares worth about $17 million as of September 2020, its latest disclosure shows.
GameStop received another vote of confidence from Chewy co-founder Ryan Cohen. The entrepreneur, who sold his online pet supplies business for $3.4 billion in 2017, spent $76 million to amass an almost 13% stake in the retailer last winter, SEC filings show.
Cohen parlayed his investment into three board seats earlier this year, fanning hopes he would revitalize GameStop and turn it into a major e-commerce player.
Endorsements from two high-profile investors, combined with a steady stream of videos promoting the stock from value investor Keith Gill on his “Roaring Kitty” YouTube channel, stoked enthusiasm for GameStop on Wall Street Bets.
The subreddit’s members spotted the opportunity for a “gamma squeeze” on the stock – buying cheap, long-shot options to force option sellers to buy GameStop shares to hedge their trades.
They also realized that GameStop’s low stock price, fewer than 70 million outstanding shares, and the fact it was one of the most heavily shorted stocks on the market made it a prime target for a “short squeeze” – bidding up the stock price so short-sellers need to buy the stock to cover their positions, sending shares even higher.
Burry highlighted the unique opportunity in a tweet earlier this week. “There really can’t be another GameStop,” he said. “Nothing else is/was even close to as shorted (100+% of float), so small (microcap), and so hated/ignored/dismissed prior to the #thebigshortsqueeze.”
“It was a uniquely perfect setup,” he added. “There won’t be another like it. Much like #thebigshort.”
Wall Street Bets members executed their plan in January, buying GameStop shares in droves. As the stock price climbed, more and more day traders (and likely some institutional investors) waded in.
GameStop shares skyrocketed as much as 2,500% from the start of the year, briefly hitting $483 last week and giving the retailer a market cap of $34 billion.
Cashing out
Burry told Bloomberg on Tuesday, January 26 that he was “neither long nor short” GameStop, indicating he sold his shares before they peaked in price the following day. Still, if he sold Scion’s entire stake at Monday’s high of $159, he made more than $250 million in profit – a roughly 1,500% gain in four months.
If Scion had held on to its 3.4 million shares as of April 2020, it could have scored an even bigger windfall of $540 million.
However, Burry doesn’t seem too broken up about the timing of his exit. Instead, he noted his role in reviving interest in GameStop and expressed concerns about mass speculation in quickly deleted tweets last week.
“If I put GameStop on your radar, and you did well, I’m genuinely happy for you,” he tweeted on January 27. “However, what is going on now – there should be legal and regulatory repercussions. This is unnatural, insane, and dangerous.”
Burry also advised big winners on GameStop to “punch out,” bemoaned the power of big money in markets, and took issue with Robinhood’s gamification of investing in later tweets.
It’s safe to say that Burry never expected his GameStop bet and calls for buybacks to pave the way for a historic short squeeze and a potential revolution in investing. Now that he’s played a key role in both “The Big Short” and “The Big Squeeze,” the investment world will be watching closely what he does next.
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