Steve Eisman: What Calls Has The Big Short Investor Made Since the Financial Crisis?

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Steve Eisman is not a name that many casual investors will recognize as readily as Warren Buffett or even Carl Icahn. Mention that he was the lead character in the movie “The Big Short” however, and you will get a strong flicker of recognition. Eisman will be forever immortalized as the protagonist of The Big Short, where he was profiled in the best-selling book written by Michael Lewis. The book was then turned into a major 2015 Hollywood film where Eisman was played by Steve Carell, under the fictionalized name of Mark Baum.

Eisman was one of the few professional investors who both understood the risks brewing in the financial markets leading up to The Great Recession and also successfully took action by shorting individual securities (such as mortgage-backed collateralized debt obligations) that made him a fortune and ultimately famous as a portfolio manager at FrontPoint Partners, which was a unit of Morgan Stanley. It is estimated that Eisman’s profits from his “Big Short” made the firm as much as $1 billion.

This foresight has made him a regular guest on financial media shows such as Bloomberg TV and CNBC, with commentators constantly seeking his next great idea, especially if it’s a “short.”

Steve Eisman’s Track Record Since The Big Short

Like many fund managers who nailed a big market call, Eisman struggled in the years immediately after the events of The Big Short. He’s not alone in this: Michael Burry (the character in the movie played by Christian Bale) has made big calls on water stocks, gold and small-caps that have yet to materialize in a big way. John Paulson, another hedge fund manager who shorted mortgage bonds, went on to have a number of years of poor performance by investing heavily in gold, along with some poor stock picks that dragged down the performance of his hedge fund.

As for Eisman, after leaving FrontPoint, he founded a new firm called Emrys Partners in 2012. The fund underperformed the market for two and half a years before he decided to shut it down, citing difficult market conditions for selecting individual stocks. He then joined the large asset manager Neuberger Berman where he remains today.

Eisman’s experience, along with many other notable fund managers like him, is a good warning that you simply can’t copy the investments of famous investors. There is a long list of notable investors who have made great calls followed by a series of duds. Unfortunately, most investors pile into these investors’ funds after they have made their most successful play, and then ride along for the less than stellar calls.

This is partly why passive investing, where investors choose to invest in index funds that buy the entire market (instead of funds that make “active” market calls) has gained so much popularity in recent years. It’s hard to be a consistent market timer, even if you’re an expert.

Be that as it may, many people are still very interested in what Eisman is up to at Neuberger Berman and his current ideas.

We’ve pieced together some of his recent calls, both longs and shorts, from his many media appearances, along with commentary from his recently launched Absolute Alpha fund, a long/short fund launched for UK investors.

Keep in mind that the dates we list are approximations based on media reports and his fund’s commentary, but these positions could be different by the time you read this. Professional portfolio managers also often scale up and down within the same position, so just because it appears that a position may be unprofitable judging by its price today, it’s possible that Eisman still found a way to book profits on some of the trades that don’t appear to be successful on first glance. Always do your own research before investing your hard-earned money.

With that said, here are some Eisman’s most notable calls, stretching from the early days of the Global Financial Crisis to today’s turbulent coronavirus markets.

Short: Strayer University (Early 2010s)

Eisman’s most notable call immediately following The Big Short was a high-profile short position in for profit educational institutions, many of which were publicly traded, including ITT Education, Strayer University and Apollo Group. Eisman made a presentation at the Ira Sohn Conference called “Subprime Goes to College,” during which he stated:

“Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.”

Eisman’s bet against for profit education providers was not a straight-forward ride for him. He was criticized for “talking up his book” and even meeting with the Secretary of Education to encourage the government to crack down on their practices. This led to Congressional testimony and being named in various lawsuits as the for-profits fought back, accusing Eisman of using the media to attempt to destroy their businesses.

While it’s difficult to know exactly when he closed his positions on these companies, there is some indication that this short was successful. The Department of Education did clamp down on student loan access to many of these institutions and their enrollment numbers suffered as a result. Strayer University, which was trading above $250 per share, began an epic fall in the spring of 2010, losing about half its value by the end of that year, on way to a low of $34 by 2014. The stock now trades under the name Strategic Education (STRA) and has since recovered some, but not all, of its share price.

Short: Tesla (2018 – 2019)

Eisman became interested in Tesla (TSLA) sometime in 2018 and discussed the stock on Bloomberg. He questioned founder Elon Musk’s ability to execute, which came after a series of mishaps and missed deadlines in delivering cars and meeting financial goals for the company.

Eisman told Bloomberg in July 2018:

“Elon Musk is a very, very smart man, but there are a lot of smart people in this world and you’ve got to execute. He’s got execution problems,” Eisman said in an interview with Bloomberg Television. “He’s nowhere in autonomous driving, as far as I can tell, and big competition is coming in his space next year.”

While it’s possible Eisman made some solid profits from his Tesla call from mid-2018 to mid-2019, when the stock declined from the mid-$300s to just above $200 per share, Musk has defied the naysayers and delivered astounding returns for investors in 2020, with the stock now trading well above $700 at the time of writing.

Like many Tesla shorts, Eisman was ultimately disappointed by this call, later telling Bloomberg that he had closed his short position on Tesla “a while ago” and that “everyone has a pain threshold…When a stock becomes unmoored from valuation because it has certain dynamic growth aspects to it, and has cult-like aspects to it, you have to just walk away.”

Long: General Motors (2018 – Present)

Part of Eisman’s rationale for betting against Tesla was that other deep-pocketed competitors with autonomous vehicle technology would be competing with the company. One such competitor Eisman actually likes is General Motors (GM).

“GM used to be a poorly run company with a terrible balance sheet and terrible products, and today it’s got a great balance sheet, it’s got very good management and it’s no longer in Europe,” said Eisman. “It’s really not a car company anymore, it’s really a truck company that also sells SUVs very profitably and it has a real division called Cruise which is a real option on autonomous driving.”

This call has yet to be a runaway success, with GM mostly trading range bound between $30 – $40 per share since Eisman has held it.

Short: Zillow (2019 – Present)

Eisman made headlines in the summer of 2019 for his latest “big short bet” on real estate data provider Zillow (Z). Eisman was particularly critical of Zillow’s move into iBuying, where the company directly buys residential homes in order to sell them back to consumers at a profit.

Eisman laid out his bear case on CNBC’s Power Lunch:

“Zillow has one of the most flawed business models I’ve seen in a very, very long time.

The part of it I find the most problematic is what they call, I believe, their iHome business, their internet buying business, where they actually go out and buy homes and flip them. I actually think the company doesn’t understand the real risks of this business, which are massive.

There are thousands of mini-markets all over the United States. They’re all local. They’re all extremely different. They all have incredibly different risks.

This is a capital-intensive business. I know only one thing for certain. Between now and five years from now, assuming the company has some level of success, there will be massive problems that they will uncover. I’m sure there’ll be write-downs, I’m sure there’ll be impairments. And I’m convinced that the investor base doesn’t have a clue about what this business is really all about.”

Eisman’s bet against Zillow had a big and immediate impact on the stock, which fell from around $48 per share at the time of the interview down to just over $29 by October. Interestingly, the stock has clawed all of those losses back and now trades slightly above where it was before Eisman’s call, at $49 per share.

Considering that Eisman’s thesis included a long-term outlook of five years plus to see iBuying problems come home to roost for Zillow, it’s reasonable to assume he has maintained his short position in the stock.

Short: Royal Bank of Canada (2019 – Present)

This short position, like the for profit education institutions, is representative of a larger sector wager by Eisman: he dislikes nearly all Canadian banks, with Royal Bank of Canada (RY) the most notable short among at least two others in the space. Discussing the CEOs of the Canadian banks he’s shorting, he said: “Psychologically, they’re extremely ill-prepared (for a normalization in the credit cycle).”

Eisman believes that Canadian banks will be hit hard by a housing slowdown in the country as credit conditions normalize. Eisman questions if the banks have adequate capital reserves to deal with such a slowdown, which is also impacting commercial credit.

So far, this bet has not paid off. While Royal Bank of Canada’s stock has had small declines since Eisman went public with his position, it’s trading nearly at the identical level today as it was in April 2019 when he made his position public.

Update: While Eisman remains short Canadian (and some European) banks, he recently told CNBC that one of his best long ideas is now the largest US banks, which he calls “long-term one of the best cyclical plays out there…now that we have a second crisis, the banks are fine.”

Long: Motorola Solutions (2019 – Present)

Motorola Solutions (MSI) is currently the largest long position in Eisman’s newly launched UK fund, Absolute Alpha. Of the company, which was spun-off from the better known consumer cell-phone company to focus on providing communications equipment to first responders and law enforcement, Eisman said:

“It’s a little obscure…What I really like about it is that it has very good management…it’s an oligopoly, it’s lightly regulated, and its business has gotten better over the last couple of years…I don’t have to worry about China. I don’t have to worry that much about a recession. It’s about as idiosyncratic a long as you could imagine.”

Motorola Solutions had a stellar 2019, rising 40%, and is up another 10.6% in 2020 at the time of writing.

Short: Trex Co. (2020 – Present)

With the coronavirus keeping more consumers in their homes, Virginia-based Trex Co. (TREX), a maker of outdoor deck materials, has seen its stock benefit as homeowners invest more to make their immediate surroundings more comfortable. Since the market lows coming off the market crash in March 2020, Trex Co. shares have more than doubled at the time of writing, now trading around $126 per share. It certainly seems like Trex is positioned to be a long-term winner in the “new normal” of a post-COVID world, along with remote technology providers and vaccine makers.

According to Steve Eisman, appearances can be deceiving and the eye-popping recent performance of Trex is not sustainable. Eisman told CNBC at the end of April 2020 that the typical customer of Trex Co. relies on loans to the tune of $15,000 to $20,000 to pay for their decks, credit that will become much harder to obtain in the current economic environment.

And there you have it! Some hits and some misses from one of the very few hedge fund managers who was the subject of a Hollywood film.

Book & Media roundup:
Buy the book: “The Big Short” (2011) by Michael Lewis
Watch “The Big Short” (2015)