Michael Burry's Molina Bet: A Value Investor's Look at the Dip

Michael Burry's latest move is a textbook contrarian play. In the third quarter of 2025, his firm, Scion Asset Management, disclosed a 35.11% stake in Molina Healthcare, making it his largest single holding. This isn't a casual bet; it's a concentrated wager that the market is overreacting to a temporary setback. The setup for that bet was created by a brutal single-day crash. On February 6, 2026, Molina shares crashed more than 25%, wiping out billions in market value in a single session. The trigger was disappointing fiscal 2026 guidance that slashed the full-year earnings outlook, sending the stock down nearly 35% from its year-to-date high.

From a value investing perspective, Burry is looking for a margin of safety. He sees a company with a durable business model operating in government-sponsored health plans-Medicaid, Medicare, and the individual exchanges-where its focus on medical cost and G&A expense management is designed to generate economic profits. The crash has created a significant price disconnect from that underlying model. The question is whether the current distress is a temporary blip or the start of a more fundamental deterioration.

Burry has openly compared his position to Warren Buffett's famous, patient investment in Geico. That analogy suggests he views Molina's current troubles as a cyclical problem in medical costs, not a broken business. His thesis hinges on a mean reversion: the market's panic is overblown, and the company's operational strength will eventually reassert itself. Yet, as the comparison implies, the path back to intrinsic value is rarely straightforward. The company's own guidance for elevated medical costs and its decision to exit certain Medicare Advantage prescription drug plans in 2027 introduce near-term headwinds that a pure value investor must weigh against the discounted price.

Assessing the Moat: Durability of the Competitive Advantage

From a value perspective, the core question is whether Molina's business model possesses a wide enough economic moat to justify the current price. The market's verdict, reflected in its valuation, is one of significant doubt. As of early February, Molina trades at a price-to-earnings ratio of 9.82. This is a discount to major peers like Cigna and Humana, which suggests investors are pricing in substantial risk. For a company with a history of strong earnings, this multiple implies the market sees a material threat to its future cash flows-a threat that a durable moat should typically mitigate.

That threat is now crystallizing in the company's own guidance. Management slashed its full-year earnings outlook to $5 per share, a figure alarmingly below prior estimates of about $14. This isn't just a minor miss; it's a fundamental reassessment of profitability. The primary driver cited is a medical cost ratio that is expected to remain elevated. For a managed care company, where profitability hinges on the gap between premiums collected and medical claims paid, this is a direct assault on the core business model. It signals persistent pressure that could erode the company's ability to generate economic profits, regardless of its historical expense management focus.

Adding to the pressure is a strategic retreat. Molina has announced it will exit Medicare Advantage prescription drug plans in 2027. On one hand, this simplifies operations and allows the company to double down on its core Medicaid and Medicare Advantage plans. On the other, it means sacrificing a revenue stream, particularly in a segment where the company had been expanding. This move, while potentially prudent for long-term focus, is a tactical retreat that underscores the difficulty of maintaining growth and margin stability in the current environment.

Viewed through the Buffett/Munger lens, the picture is one of a business under siege. The wide moat of government-sponsored contracts is being tested by adverse medical cost trends, and the company is responding with both a guidance cut and a strategic contraction. The low P/E ratio is the market's way of saying it doesn't yet see a clear path to mean reversion. For a value investor like Burry, the bet is that this pressure is cyclical and temporary, and that the underlying model can reassert itself. But the durability of that advantage is now in question, making the margin of safety he seeks a much narrower one than in a typical, stable compounding story.

Valuation and the Margin of Safety

The recent crash has created a stark price disconnect from Molina's historical performance. The stock now trades around $132, a steep discount from its 52-week high near $205. This plunge, which wiped out billions in market value in a single session, is the core of the value proposition for a contrarian like Michael Burry. He has publicly stated he is happy with his MOH investment, a position he has likened to Berkshire Hathaway's famous, patient bet on Geico. That analogy is critical. It frames the current distress not as a broken business, but as a cyclical problem in medical costs-a situation where the market's panic has created a potential margin of safety.

Yet, this margin is narrow and fraught with risk. The company's own guidance for $5 per share of earnings for the full year is a fundamental reassessment that implies the market's skepticism is not entirely baseless. The low price-to-earnings ratio of 9.82 is the market's verdict on that reassessment. It suggests investors see a material threat to future cash flows that a durable moat should typically mitigate. For a value investor, the bet is that this pressure is temporary and that the underlying model can reassert itself. But the durability of that advantage is now in question, making the margin of safety he seeks a much narrower one than in a typical, stable compounding story.

A key risk to that thesis is increased political pressure. The company faces the prospect of proposed reductions in Medicare Advantage reimbursement rates from President Donald Trump's administration. This is a direct threat to profitability in a segment where the company has been expanding. It adds a layer of regulatory uncertainty that is absent from the Geico comparison, where the recovery was driven by internal underwriting discipline. This political headwind introduces asymmetric downside risk, as noted by analysts who point to options data suggesting the stock could crater another 20% over the next five months.

The bottom line is that Molina presents a classic, high-stakes value setup. The price is deeply discounted, creating a potential margin of safety for a patient investor. Michael Burry's bet is a long-term, contrarian view that the market is overreacting. But the path back to intrinsic value is not guaranteed. It must navigate persistent medical cost pressure, a strategic retreat from a revenue stream, and now, heightened political risk. For the value investor, the decision hinges on whether the current price adequately compensates for these specific, near-term frictions or if they signal a more profound erosion of the business's economic moat.

The Burry Bet vs. The Bear Case

The investment thesis here is a classic tug-of-war between two narratives. On one side, the bear case is built on a foundation of severe fundamental deterioration. The company's own guidance cut is the central pillar: management slashed its full-year earnings outlook to $5 per share, a figure alarmingly below prior estimates. This isn't a minor miss; it's a fundamental reassessment that points to a medical cost ratio expected to remain elevated. The bear argument then compounds this by highlighting a strategic retreat. Molina has decided to exit its Medicare Advantage prescription drug plans in 2027, a move that sacrifices a revenue stream and suggests the company is retreating from a profitable segment. Together, these points question the sustainability of earnings and signal a business under pressure, not one poised for a quick recovery.

On the flip side, Michael Burry's contrarian bet assumes the current price decline is an overreaction to temporary medical cost pressures and a necessary strategic shift. His analogy to Berkshire's Geico investment is telling. It frames the situation as a cyclical problem in claims dynamics, not a broken business model. The crash, which saw the stock drop more than 25% in a single session, is seen as the market's panic selling, creating a potential margin of safety. The low price-to-earnings ratio of 9.82 is evidence of this oversold state, trading at a discount to major peers.

Yet, the value investor must weigh the evidence carefully. The "oversold" claim is supported by the stock's dramatic single-day crash and its depressed valuation. But this must be weighed directly against the fundamental deterioration. The bear case isn't just about a bad quarter; it's about a guidance cut that implies the medical cost headwinds are persistent and a strategic retreat that cedes ground. The risk-reward profile appears asymmetric to the downside, as noted by analysts who point to options data suggesting the stock could fall another 20% over the next five months.

The bottom line is that this is a high-stakes bet on the durability of Molina's moat. The bear case argues the moat is being breached by adverse trends and strategic retreat. The Burry bet argues the market is overreacting to a temporary storm. For the patient investor, the decision hinges on whether the current price adequately compensates for the specific, near-term frictions of elevated medical costs, a planned exit from a revenue stream, and heightened political risk. The crash created a discount; the question is whether it's a deep enough one to cover the journey back to intrinsic value.

Catalysts and Risks: What to Watch for the Thesis

For the value investor, the path forward hinges on a few clear catalysts and risks. The thesis that the market is overreacting requires validation through near-term execution and favorable shifts in the business environment.

First, the company's own quarterly reports will be critical. Investors must monitor the medical cost ratio for any signs of improvement, as elevated costs are the core of the current distress. More importantly, management must demonstrate disciplined execution on its planned exit from Medicare Advantage prescription drug plans in 2027. This strategic retreat is a double-edged sword; it simplifies operations but sacrifices revenue. Success here would signal operational focus, while missteps could confirm the bear case of a business in retreat.

Second, regulatory developments pose a material, external risk. The company faces the prospect of proposed reductions in Medicare Advantage reimbursement rates from the current administration. This is a direct threat to earnings power in a segment where Molina has been expanding. Any move to cut payments would exacerbate the medical cost pressure and could fundamentally alter the company's profitability model, introducing a layer of political uncertainty absent from a typical cyclical recovery story.

Finally, the valuation itself must be assessed against these specific risks. The stock trades at a price-to-earnings ratio of 9.82, a deep discount to its own history and to peers. This low multiple is the market's compensation for the evident execution risk and policy uncertainty. The question for the patient investor is whether this discount is wide enough to cover the journey back to intrinsic value. Given the asymmetric downside suggested by options data, the margin of safety is narrow. The setup demands patience, but it also demands that the company navigate its near-term headwinds without further deterioration.