Which Stocks Could Come Out Ahead in a Market Crash: Michael Burry’s Crisis Plan

The U.S. stock market is sending alarming signals, warns Michael Burry, who predicted the 2008 financial crisis. In early October, the S&P 500 hit a new all-time high, even though the stocks of many companies in the index had already fallen significantly in price. Burry sees this as a sign of market weakness and compares the current situation to the period leading up to the dot-com crash in 2000.

In his blog, *Cassandra Unchained*, the investor spent the weekend analyzing past market downturns and the financial metrics of current underperformers to determine whether any of them offer attractive buying opportunities that could outperform the market during the next downturn.

To assess the sustainability of the S&P 500’s growth, Burry examined 982 record closing levels of the index since 1980 and compared them across seven metrics that reflect the performance of stocks within the S&P 500. According to his assessment, the October record was one of the worst in 46 years across each of these metrics. A similar situation was observed only before the dot-com crash in March 2000, Burry writes.

Behind the S&P 500’s current record lies a wide gap between stocks that remain near their highs and those that have already fallen significantly, according to Burry. He divided the index’s stocks into three groups based on the extent of their decline from their all-time highs over the past ten years: he classified stocks within 10% of their all-time highs as “leaders,” those that had lost 20–40% as “battered,” and those that had fallen by more than 40% as “crushed.”

As of October 6, when the U.S. stock market last set a record, there were 97 companies in the “leaders” group—that is, those that had lost up to 10% from their highs—compared with 87 in March 2000. Another 114 companies—or 23% of the S&P 500 index—fell into the “crashed” category: their stocks lost an average of 55% of their value. In March 2000, such companies accounted for 32% of the index.

Historically, the widest yield gap between market leaders and laggards emerged precisely after March 2000, when the dot-com bubble burst: over the next year and a half, the “crashed” stocks rose by an average of 18%, while the former favorites plummeted by 50%, according to Burry’s calculations. However, this scenario is more of an exception—for example, over a similar period following the peak in September 2018, heavily discounted stocks lost 56%, while the market leaders lost only 20%.

Burry acknowledges that during the next bear market, heavily discounted stocks may once again outperform the market leaders. However, the investor cautions that a decline in stock prices alone does not necessarily mean that stocks have become cheap. When selecting companies, he evaluates two metrics: how efficiently the business uses its invested capital and how much investors are paying for its profits.

To assess business performance, Burry uses return on invested capital (ROIC) adjusted for employee stock compensation. Among companies whose stock lost more than 40% of its value, footwear manufacturer Deckers, restaurant chain Chipotle, and software developer Adobe posted the highest returns. The top ten also included research and consulting firm Gartner, continuous glucose monitoring system manufacturer Dexcom, hard drive manufacturer Western Digital, advertising technology developer AppLovin, athletic apparel and footwear brand Lululemon, credit scoring system developer Fair Isaac, and Verisk, a provider of data and analytics for the insurance industry.

However, high profitability does not mean that a company’s stock is cheap. That is why Burry also assesses its value relative to the profits of the business owners. The cheapest stocks by this metric were those of telecommunications company Charter Communications, retailer Lululemon, and energy company AES. Next on the list are fintech company PayPal and alcoholic beverage manufacturer Constellation Brands. AppLovin, which ranks among the top ten most profitable companies, did not make it onto Burry’s list of the cheapest stocks.

At the same time, Burry warns investors against “value traps”: stocks may fall in price simply because the business itself is struggling. According to him, in today’s market, one cannot simply snap up every asset that has fallen in price—the search for investment ideas is more like a targeted “spearfishing” expedition, where it is critically important to carefully select businesses and not rush into purchases even after sharp declines.

Anticipating a market crash, the investor himself invested in companies whose stock prices had already fallen sharply. His portfolio includes—or recently included—payment services PayPal and Fiserv, veterinary drug manufacturer Zoetis, and software developer Adobe. According to Burry, most of these companies are characterized by high return on equity and positive average annual revenue growth over the past three years.

The investor is holding heavily discounted S&P 500 stocks in anticipation of their rise, while simultaneously betting on a decline in the shares of AI companies and semiconductor manufacturers. Burry expects to profit from both strategies, so his short positions serve as a standalone bet on a market decline rather than merely a hedge against potential losses.

In addition, Burry is considering selling or reducing his holdings in shares of retail giant Walmart, tech giant Alphabet, and oil company Valero, which have generated strong returns for him but now seem too expensive.

In 2000, investors were shifting money from expensive stocks of market leaders to stocks of companies that had already fallen sharply in price. Today, there are fewer such opportunities within the S&P 500, according to Burry. “Beaten-down” stocks—those that have lost more than 40% from their 10-year highs—are now trading at significantly higher multiples relative to companies’ earnings and revenue than they were in 2000.

Therefore, Burry suggests that capital from the stocks of current market leaders may flow out of the S&P 500 or into fixed-income securities. Between 1999 and 2007, stocks of small, undervalued companies already benefited from capital inflows from the securities of former market leaders: the Russell 2000 Small Cap Value Index, which tracks the performance of undervalued small-cap stocks, significantly outperformed the S&P 500 in terms of returns during that period.

Burry himself also buys stocks that are not included in the S&P 500 index. He has invested in Temple & Webster, an Australian home goods and furniture retailer, and has purchased stocks in Hong Kong’s technology sector. In addition, he believes it’s worth taking a closer look at undervalued stocks of small U.S. companies, such as Build-A-Bear —a company that offers interactive stuffed animals.

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This article was AI-translated and verified by a human editor