Warren Buffett counts Geico among the best investments of his career. Michael Burry says Molina Healthcare could be an even better bet today.
Burry, who recently pivoted from hedge fund manager to Substack writer, compared the health insurer to the auto insurer in a Monday article titled: “Molina Healthcare: Ghosts of GEICO Past.”
He labeled Buffett’s purchase of beaten-down Geico stock in 1976 as the “real steal” — but said it was arguably riskier than buying Molina stock today, and called the company a “better business proposition in many ways too.”
Burry wrote that Molina “has a clearer path to significant double-digit long-term growth than Apple,” adding that if he were “sitting on enough billions,” he would acquire the company outright.
“Maybe Buffett, if he were in his 40s and only just ramping up his insurance investments, would buy it here for a much smaller Berkshire,” he added.
‘Diamond in the rough’
Buffett first bought Geico stock as a college student in 1951. He returned to build a large stake in the auto insurer via his Berkshire Hathaway conglomerate in 1976, then acquired the entire company in 1996.
Geico has grown its pre-tax underwriting earnings from $171 million in 1996 to $7.8 billion last year, making it one of Berkshire’s biggest and most profitable subsidiaries.
The insurance “float” — premiums collected before claims are paid out — that comes from Geico has also been a key source of funding for many of Buffett’s investments.
Burry, who shot to fame after his prescient bet on a US housing crash was chronicled in the book and movie “The Big Short,” laid out his investment case for Molina in a nearly 6,000-word post.
“Molina, like GEICO in those early days, operates at the lowest expense ratio in its industry and focuses on a well-defined customer base it knows very well,” he wrote.
He said its focus on Medicaid enrollees and the fact that it doesn’t have to employ its own agents are also advantages for the company.
While some investors might steer clear of the convoluted US health insurance industry, Burry said he sees not a “politically complex mess far from the spectacle of acres of flashy new AI servers,” but a “profitable niche arbitraging political dysfunction for the health of investors and society.”
He added that a “perfect storm” of rising healthcare costs, sicker patient pools, and legislative changes has resulted in “troubled times” for the industry.
Shares of Molina have plunged from highs of around $415 last year to trade around $165, and they could fall below $100 if federal budget cuts spook markets, he said.
“Molina would be a generational buy at that price” as its current challenges will likely prove temporary, he said.
He lauded what he called a “dramatic” turnaround since Joe Zubretsky took over as CEO in late 2017 and flagged the chance it could be identified as a “diamond in the rough” and bought out.
“Here we have best loss ratio, the best expense ratio, the best win rate, and the most conservative accounting in one insurer,” he said, adding that Molina looks well placed to outearn its rivals this year and ride high once the tide turns.
