Michael Burry has made huge money betting against crowded markets before. Now he is doing it again - this time against Caterpillar, a stock he once loved. "Caterpillar jumped out at me," Burry said. "I have never shorted Caterpillar. It has always done great for me on the long side in the past."
Burry's past successes include his prescient short of the subprime mortgage market before the 2008 financial crisis and a later profitable bet against the Nasdaq during the early 2000s tech bust. He now sees similar warning signs in the AI infrastructure boom that has lifted Caterpillar and other stocks.
A short bet is a wager that a stock's price will fall. The investor profits if the shares drop, and loses money if they rise.
That rally came as investors piled into any company connected to artificial intelligence. Construction-equipment makers like Caterpillar benefit when AI data centers and factories get built.
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But Burry thinks the stock is overvalued. One key measure he looks at is the price-to-sales ratio, which compares a company's stock price to its revenue per share. Caterpillar's price-to-sales ratio recently reached a point not seen in thirty years. That is a warning sign, Burry says - like a rubber band stretched too far.
Burry's analysis draws on historical patterns of overvaluation. He points out that the Philadelphia Semiconductor Index is currently trading 65% above its 200-day moving average, a gap he likens to the extreme premium seen just before the dot-com crash in 2000. He believes the recent South Korean spending is the final push that often marks a top in such rallies.
Burry believes the entire rally in AI-related stocks has become too expensive.
The trigger for Burry's latest bet came from overseas.
But Burry sees it as a signal that the cycle is peaking. "The proximate cause of today's rally is big spending announced out of Korea," he said. "Well, I see that as the beginning of the end. It is only a matter of time now."
In previous cycles, such as the dot-com era, extreme investor enthusiasm pushed valuations to unsustainable levels before a sharp downturn. Burry's own track record shows that when crowded trades get too expensive, the eventual reversion can be severe and rapid.
Burry expects the rally in AI-linked stocks to reverse. Investors should watch whether other companies also start to look overvalued by long-term measures like price-to-sales ratios. If Burry is right, Caterpillar and the others could face a sharp drop.
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