Thread by @ValueSituations

Great investment ideas are found by turning over lots of rocks. In my newsletter today I wrote about how creative thinking is essential to finding which rocks to look under for ideas.
How about a thread on how Dr. Michael Burry used creative thinking to find a great idea?👇👇👇

1) Burry recognised that he needed to find unorthodox ways to tilt the market to his advantage, and that usually meant finding unusual situations the world might not be fully aware of. This led him to think creatively about how he searched for new ideas.

2) In 2001, Burry came across Avant! Corporation, a software business that was subject to a lawsuit from a competitor accusing it of stealing trade secrets. Burry found Avant! by searching for legal news stories that might lead to an investment thesis.

3) Avant! appeared in his search of the word “accepted” as Santa Clara court had accepted a plea deal from Avant! to settle the lawsuit. Burry viewed this settlement as a possible catalyst for Avant’s stock which appeared fundamentally undervalued despite the perceived legal risk

4) Avant! had $100m in cash & was generating $100m in FCF but only had a mkt cap of $250m. Burry researched the situation in detail & concluded that even if Avant’s execs were jailed & fines paid (which they were), the business would be worth a lot more than the mkt cap

5) Burry initially bought Avant's stock at $12/share in Jun-01 & continued buying all the way down to $2 after Avant’s management appeared on the cover of Business Week with the headline "Does Crime Pay?" In Dec-01, Avant! was acquired by Synopsis for $22 a share.

6) Some key takeaways from the Avant! case:
(i) Burry didn’t find this idea by mechanically screening for stocks based on superficial criteria such as low P/E ratios, or from reading investment bank/broker research notes

(ii) Instead he thought creatively and searched for an event or situation that might lead to an idea - in this case a legal settlement that would unlock value.

(iii) Burry made sure he understood the situation and the potential range of outcomes, i.e. he considered the downside scenario (jailing, fines) in order to conclude on the investment merits vs. risks.

(iv) The situation was supported by clear, fundamental value with downside protection; the balance sheet and FCF provided a substantial margin of safety

(v) A catalyst was present, in that the resolution of litigation would likely trigger a re-rating (in this instance via acquisition)

7) While Burry's Avant! idea was a particularly complex situation, it’s a useful reminder that attractive opportunities can be found through creative thinking, patience and a persistent turning over of many rocks.

8) If you found this thread interesting, you can read today’s newsletter here -valuesits.substack.com/p/between-untu…

Also please follow me on Twitter and subscribe to the newsletter (it's free) at valuesits.substack.com. Subscribers get a Quick Ideas letter each week, and a longer form investment memo on an actionable idea every 4 weeks or so. Thanks, and feedback welcome!