Investor Michael Burry has 10% of his portfolio in these 2 dirt-cheap value stocks

Contrarian investor Michael Burry has taken large stakes in these two well-known value stocks. Which one would I rather buy?

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Image source: BP plc

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Michael Burry likes to buy deep value stocks. That is, those he believes are trading significantly below their intrinsic value and offer a margin of safety.

However, he’s still best known as a character in the inspiring the book, The Big Short, by Michael Lewis, which was adapted for the big screen.

In a memorable scene, a stripper casually mentions owning five houses and a condo, all financed with adjustable-rate subprime mortgages — not realizing that the introductory interest rates will adjust to unaffordable levels. This sparks a revelation that the subprime housing market was a bubble.

In real life, Burry shorted (betted against) the market and made a fortune when the bubble burst in 2007/08. Today, he runs Scion Asset Management, which has recently been scooping up shares of these two value stocks.

BP

At the end of March, Burry had a position in oil major BP (LSE: BP). It was worth around 6.4% of the $103m portfolio. What did he see in the oil stock?

For one, it’s certainly cheap, trading on a price-to-earnings (P/E) ratio of 11. That’s lower than global peers and fellow FTSE 100 constituent Shell (12.8).

The firm also recently announced a hefty $1.75bn share buyback for the current quarter (Q2), while there’s a 4.9% dividend yield. So there’s a lot to like on the surface here.

Of course, like all oil stocks, BP is ultimately beholden to where the price of black gold heads. Geopolitical events and supply disruptions can push the price — and BP’s profits — one way or the other.

Alibaba

A significant part of Scion Asset Management’s portfolio is also invested in Chinese stocks. These have long been out of favour, making them attractive to Burry’s contrarian investing approach.

One stock he owns is Alibaba (NYSE: BABA), which recently made up 3.5% of the portfolio.

While BP has long been a value stock, Alibaba used to be known as a high-octane growth stock. It operates in e-commerce, cloud computing, logistics, digital entertainment, and global cross-border retail.

But it’s now fallen 53% in five years. So what’s gone wrong at the Chinese internet giant?

Well, for starters, there has been a massive regulatory crackdown on large Chinese tech firms in recent years. Alibaba was right in the firing line, receiving eye-watering fines for various monopolistic breaches.

Founder Jack Ma even disappeared for a while after criticising China’s financial regulators in 2020.

Needless to say, such things haven’t inspired trust in the sector with investors. And we can see this in the valuation. Today, Alibaba stock trades on a forward P/E multiple of just 8.9. That’s dirt cheap for a global tech firm that grew its top line by 8.3% in its last financial year.

According to the company’s latest financial report, it had $79bn in cash and equivalents. That’s a lot relative to its $178bn market cap.

My pick

Which one would I personally invest in if I had spare cash to invest? While they’re very different propositions, I’d have to go with BP over Alibaba.

The stock has a much higher dividend yield than Alibaba’s 1.3%, and appears far safer from immediate regulatory intervention.

The Chinese firm also faces mounting competition in its home market from the likes of PDD Holdings and TikTok owner ByteDance.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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