Burry analyzed stocks that have fallen sharply from their highs, asking whether the market’s biggest laggards could become the unexpected winners if today’s bull market eventually gives way to a bear market.
- Burry noted that the current setup closely resembles the months surrounding the March 2000 market top.
- He highlighted that as of the Oct. 6 record high, 23% of S&P 500 stocks were already Busted, with the median Busted stock down 55% from its high. In 2000, 32% were Busted, with a median decline of 52%.
- Burry said that this makes the current cohort of deeply beaten-down stocks particularly interesting, while adding that simply being down 40% does not make a stock cheap.
“The Big Short” investor Michael Burry drew comparisons between the current stock market and the dot-com era, calling the current market “uncannily close” to 2000, while adding that the S&P 500’s internal breadth looks unusually weak even as the index remains near record highs.
In his latest Substack note, Burry analyzed stocks that have fallen sharply from their highs, asking whether the market’s biggest laggards could become the unexpected winners if today’s bull market eventually gives way to a bear market.
A 2000-Like Market Under The Surface
Burry split the S&P 500 into three groups, namely, “Leaders,” “Broken stocks,” and “Busted stocks”.
Burry defined “Leaders” as stocks which are within 10% of their 10-year highs. “Broken stocks” are those which are down 20%-40% from these highs, while “Busted stocks” are those which are down more than 40%.
“The Big Short” investor noted that the current setup closely resembles the months surrounding the March 2000 market top.
He highlighted that as of the Oct. 6 record high, 23% of S&P 500 stocks were already Busted, with the median Busted stock down 55% from its high. In 2000, 32% were Busted, with a median decline of 52%.
However, Burry said the bigger warning comes from the leadership itself. Just 15 S&P 500 stocks closed at record highs on Oct. 6, while only 97 were within 10% of their highs, which is strikingly similar to the numbers during the March 2000 peak.
More importantly, 58% of today’s Leaders were already 5%-10% below their highs, which Burry describes as unusually “soft” leadership. “It is striking,” Burry added.
He found that the Oct. 6 record was at or beyond the 95th percentile on all seven of his key market-top measures, which is a combination he says has appeared only during the final months leading into the 2000 peak.
Burry’s ‘Busted’ Stocks Could Be The Next Winners
Burry examined what happened to beaten-down stocks after previous market tops, saying that the March 2000 peak was the standout.
He highlighted that eighteen months after that top, Busted stocks gained 18% on a median basis, while Leaders plunged 50%. At 12 months, Busted stocks were up 19%, compared with a 33% decline for Leaders.
Burry said that this makes the current cohort of deeply beaten-down stocks particularly interesting, while adding that simply being down 40% does not make a stock cheap.
Instead, Burry says he looks at owners’ earnings, return on invested capital and valuation.
Among the Busted stocks, he highlights names including Lululemon Athletica Inc. (LULU), PayPal Holdings Inc. (PYPL), Fiserv Inc. (FISV), Deckers Outdoor Corp. (DEC), Zoetis Inc. (ZTS) and Adobe Inc. (ADBE) as examples of companies that combine relatively strong business characteristics with depressed valuations.
He also points to AppLovin Corp. (APP), which has one of the highest calculated ROIC figures among the Busted group even after his adjustment for stock-based compensation. “This is not shooting fish in a barrel,” Burry cautioned.
Why Burry Is Looking Beyond Big-Cap Stocks
Burry’s comparison between 2000 and 2026 also leads him toward smaller companies.
He argues that today’s Busted stocks are not as cheap as their counterparts were in 2000. The median price-to-earnings ratio for today’s Busted stocks is about 17.2 times, versus 10.2 times in 2000. Median price-to-sales is also substantially higher today.
That could limit how much capital simply rotates from today’s market leaders into beaten-down S&P 500 stocks.
Instead, Burry sees the possibility of money moving outside the index — particularly into smaller companies and small-cap value.
He points to the period from 1999 through 2007, when the Russell 2000 Small Cap Value Total Return Index substantially benefited as liquidity moved away from large-cap leaders.
Today, he says he has found enough opportunities among Busted stocks, international equities and small-cap value to remain essentially fully invested alongside his short positions.
“Time will tell if this is as it appears – a 2000 redux, with the Busted far outperforming the Leaders – or just another bear market where the Busted fall along with the Leaders,” Burry said.
During the after-hours session on Friday, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, gained 0.15%; the Invesco QQQ Trust ETF (QQQ) edged up by 0.07%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.13%. Retail sentiment on Stocktwits toward the S&P 500 ETF was in the ‘extremely bearish’ territory at the time of writing.
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