Miller Opportunity Trust 2Q 2022 Quarterly Investment Review

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Bill Miller
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Summary

  • During the second quarter of 2022, the Miller Opportunity Trust – Class I shares generated a total return of -29.45% excluding sales charges.
  • Using a three-factor performance attribution model, selection, allocation and interaction effects contributed to the portfolio’s underperformance.
  • Relative to the index, the fund was overweight the Consumer Discretionary, Financials, Materials, and Energy sectors on average during the quarter.
  • The portfolio added two positions and eliminated seven positions during the quarter.

Business financial concept with double exposure stock market up trading line

Jira Pliankharom

During the second quarter of 2022, the Miller Opportunity Trust – Class I shares generated a total return of -29.45% excluding sales charges. In comparison, the Fund’s unmanaged benchmark, the S&P 500 Index, returned -16.10%.

Top Ten by Issuer as of 6/30/22

Name

% of Portfolio

Alibaba Group Holding Ltd. (BABA)

6.2

Ovintiv Inc. (OVV)

5.8

Mattel, Inc. (MAT)

5.4

DXC Technology Co. (DXC)

5.2

Alphabet Inc. (GOOG, GOOGL)

4.9

Amazon.com Inc. (AMZN)

4.8

Teva Pharmaceutical Industries Ltd. (TEVA)

4.6

OneMain Holdings, Inc. (OMF)

4.4

Energy Transfer LP (ET)

4.0

Taylor Morrison Home Corporation (TMHC)

3.9

Total

49.2%

Using a three-factor performance attribution model, selection, allocation and interaction effects contributed to the portfolio’s underperformance. iShares 20+ Year Treasury Bond ETF 1/24 P143 (TLT), Alibaba Group Holdings Ltd., Karuna Therapeutics (KRTX), TCRT Restricted Warrant 2019, and Pangaea One, L.P. were the largest contributors to performance, while Norwegian Cruise Line Holdings Ltd. (NCLH), Coinbase Global Inc. (COIN), Bausch Health Companies Inc. (BHC), Cleveland-Cliffs Inc. (CLF) and Green Thumb Industries Inc. (OTCQX:GTBIF) were the largest detractors.

Relative to the index, the fund was overweight the Consumer Discretionary, Financials, Materials, and Energy sectors on average during the quarter.

With zero allocation to Real Estate, and Utilities the fund was underweight these sectors along with Communication Services, Consumer Staples, Industrials, Information Technology, and Healthcare sectors.

The portfolio added two positions and eliminated seven positions during the quarter, ending the quarter with 39 holdings where the top 10 represented 49.2% of total assets compared to 27.0% for the index, highlighting the fund’s meaningful active share of around 105.6%.

New and Eliminated

This quarter we entered two new names while exiting six names, as we looked to take tax losses and capitalize on dislocations between fundamentals and expectations, particularly in the travel sector.

Our largest new position is Expedia Group Inc. (EXPE), a leader in the online travel space. Despite a significant rebound in travel and Expedia’s Earnings Before Income, Taxes, Depreciation, and Amortization (EBITDA) projected to reach record levels, Expedia is down 46.6% YTD versus the S&P 500 down 17.6%. The company continues to see strong demand with overall traffic to Expedia brand websites growing 59% YoY and 36% YoY in April and May.

The company has been on a multi-year transition focusing on launching its single tech platform to host all its brands and products which is expected to launch in 2023. This will help create efficiencies within the business which has long-run each brand as a stand-alone operation. From a cost perspective, the company has been focused on exiting less profitable markets (namely Southern Europe) while also pulling back marketing spend that historically would compete with owned brands.

The company is on track to realize ~$1B in savings. While the market is focused on recession, historically, overall travel spending during recessions (outside of COVID) result in spending declines in the high-single digits. With the stock trading down 4x as much, this seems more than priced in. The high free cash flow generation provides further support to the stock with the company expected to average a 20% free cash flow yield in 2023. We believe this company presents an attractive risk/reward benefitting from an internal transition, externally strong pent-up demand, and strong FCF generation.

United Airlines Holdings (UAL)was the other new addition in the quarter. The airline sector struggled in the second quarter as the market focused on rising input costs, particularly fuel. Despite this, CEO Scott Kirby called out a once-in-a-decade opportunity citing stronger demand than he has ever seen in his career and that’s even before business and international travel has fully recovered. The consolidation of US legacy players led to a decade-plus of more capacity discipline which is now being further enforced by the pilot shortage which is expected to last through the decade.

his natural limit on capacity growth should support better pricing power with further benefits from high operating leverage in the business model. United is uniquely positioned as the company has the ability to grow earnings power through up gauging its fleet (adding more seats) without the need for additional pilots. As the company has focused on the customer over the last few years, we have seen strong improvement in NPS (net promoter score) scores which should continue to flow through the model via better TRASM (total revenue per available seat mile) and higher cash flows and earnings.

The company has guided for $20 in earnings per share (EPS) in 2026, or a 1.8x multiple, which no one appears to be giving them credit for. For a company that is positioned to benefit from strong pent-up demand, guiding for record 2Q revenues with positive free cash flow, and liquidity levels more than double historical levels, we think the market is undervaluing this once in a decade opportunity.

We exited the Herbalife Nutrition Ltd. (HLF), Tupperware Brands Corp (TUP), and WW International Inc. (WW)in the quarter to take advantage of tax loss harvesting. The JD.COM Call Options C75 1/24 and the Uber Technologies Inc. Call Options C37.5 5/23 were exited to lower the leverage within the fund while being used to increase stock weightings. Stitch Fix Inc.(SFIX) was a small position that was used to fund new ideas while Tivity Health Inc. (TVTY)was exited following its announced acquisition by Stone Point Capital in April.

Top Contributors & Top Detractors

Top Contributors

Ticker

Bps Contribution

TLT 2024 Put Options

TLT US 1/19/24 P143

88

Alibaba Group Holding Ltd.

BABA

37

Karuna Therapeutics Inc.

KRTX

6

TCRT Restricted Warrant 2019

TCRT/WS 2019

3

Pangaea One L.P.

PANGAEA

1

Top Detractors

Ticker

Bps Contribution

Norwegian Cruise Line Holdings Ltd.

NCLH

-211

Coinbase Global Inc.

COIN

-182

Bausch Health Companies Inc.

BHC

-181

Cleveland-Cliffs Inc.

CLF

-180

Green Thumb Industries Inc.

GTBIF

-173

Top Contributors

  • Our puts on the 20+ year Treasury Bond ETF (TLTUS1/19/24P143) which we initiated as a hedge in 2021 on expectations that interest rates would rise, contributed the most to quarterly performance. The position benefited as the long-end of the curve continued to move higher as the Federal Reserve raised the short-end of the curve through increasing rate hikes. The 30-year reached a level not seen since 2018, ending the quarter at 3.18%. We’ve trimmed the position, but have maintained a continued hedge.
  • Alibaba Group Holdings Ltd. ADS (BABA)was a top contributor to the fund in 2Q as the company fought its way back from the lows seen in 1Q as the Chinese market began to re-emerge from strict lockdowns in April. The company reported 4Q results which beat low expectations while returning cash to shareholders via increasing buybacks. While major uncertainties continue to surround the Chinese market regarding the strict adherence of their Zero-COVID policy, and whether or not tech regulation has peaked, Alibaba largely appears to be pricing in significant pessimism. With the stock trading back to 2016 price levels, despite expected earnings 4x larger, we believe you are getting a top player in the Chinese market, with a defensible cloud position at an extremely attractive valuation.
  • Karuna Therapeutics Inc. (KRTX)had a lot of volatility over the quarter but ended up largely flat. We’ve done well with the position since initiation. The company is still clinical stage but has a largely de-risked asset, KarXT, focused on schizophrenia, a treatment area that has not had a new innovative treatment in decades. The company has shown strong Phase II data with Phase III results expected within weeks and an NDA (new drug application) submission expected in 2023. Furthermore, the company is developing KarXT in Alzheimer’s disease psychosis, providing the potential for further upside, a patient population where the mechanism of action has historically demonstrated both cognitive and behavioral improvements. We think the large opportunity in the schizophrenia space alone justifies a price more than double where it is currently trading.

Top Detractors

  • Norwegian Cruise Lines Ltd. (NCLH) declined over the period returning to price levels not seen since the lows in 2020, just as fundamentals started looking up despite the company expecting record adjusted EBITDA in 2023. The company is expected to resume generating positive operating cash flow in the second half of this year. Despite the strong outlook, the company is currently trading at almost half its long-term average P/E of 12x, implying a double from here simply on a return to historical averages. With strong pent-up demand and bookings that continue to track strongly, we think you are getting an opportunity to buy a name at COVID fire sale prices right with strong and improving fundamentals.
  • Coinbase Global Inc. Ordinary Shares (COIN)fell during the quarter as the crypto markets continued to suffer. While the company reported disappointing results, they committed to capping EBITDA losses at $500M even in the event of “a prolonged market downturn”. COIN’s ample liquidity ($6b in cash on hand) should enable them to survive a prolonged “crypto winter” and invest to strengthen the business in the downturn. While the crypto market is early in its adoption, Coinbase is focused on building the platform for crypto not only supporting trading, and cold storage, but moving into NFTs, staking and crypto derivatives. We see tremendous upside potential for COIN over the next decade if they are able to successfully execute on their platform strategy.
  • Bausch Health Companies Inc. (BHC)declined during the quarter as the company consummated its Bausch+Lomb IPO at valuations far below expectations, reported disappointing Q1 2022 results and delayed its plan to spin out its Solta (aesthetics) business due to difficult market conditions. While the company spun-off 10% of Bausch+Lomb (BCLO) they retained 90% of the company which they intend to distribute once they have met their target leverage ratio of 6.5-6.7x. The future spin-off value of the Bausch+Lomb piece represents a value of $12.55 per share, 39% above where Bausch Health is currently trading. The company recently appointed John Paulsen as Chair of the Board, which should accelerate value realization.

Performance Attribution Analysis

Opportunity Trust

S&P 500

Management Effect

Weight

Return

Weight

Return

Allocation

Selection

Interaction

Total

Equity-Long Positions

111.72

(26.17)

100.00

(16.10)

(1.77)

(9.28)

(0.52)

(11.57)

Communication Services

7.79

(24.13)

8.95

(20.71)

0.09

(0.30)

0.01

(0.20)

Consumer Discretionary

35.64

(29.07)

11.20

(26.16)

(2.53)

(0.29)

(0.67)

(3.49)

Consumer Staples

1.28

(29.12)

6.61

(4.62)

(0.44)

(1.44)

0.88

(1.00)

Energy

12.41

(13.39)

4.47

(5.17)

0.49

(0.27)

(0.54)

(0.32)

Financials

14.55

(29.74)

10.99

(17.53)

(0.04)

(1.36)

(0.46)

(1.86)

Health Care

12.83

(36.12)

14.33

(5.91)

(0.09)

(4.22)

0.52

(3.79)

Hedge

2.98

52.70

0.00

0.00

0.44

0.00

0.81

1.25

Industrials

7.41

(31.15)

7.66

(15.19)

(0.02)

(1.20)

(0.20)

(1.41)

Information Technology

13.59

(18.41)

27.28

(20.08)

0.61

0.45

(0.27)

0.79

Limited Partnership

0.27

7.67

0.00

0.00

0.04

0.00

0.01

0.05

Materials

2.98

(52.30)

2.73

(15.90)

0.01

(1.17)

(0.11)

(1.26)

Real Estate

0.00

0.00

2.84

(14.72)

(0.04)

0.38

(0.38)

(0.04)

Utilities

0.00

0.00

2.93

(5.09)

(0.29)

0.13

(0.13)

(0.29)

Cash

(11.72)

0.00

0.00

0.00

(1.57)

0.00

0.00

(1.57)

Total

100.00

(29.23)

100.00

(16.10)

(3.34)

(9.28)

(0.52)

(13.13)

The data provided is from FactSet Research Systems and is believed to be reliable, but is not guaranteed as to its timeliness or accuracy. Percentages and returns may not sum to 100% due to rounding effects. A three-factor attribution consists of the allocation effect, selection effect, and the interaction effect, which sum to the portfolio’s performance relative to the benchmark. *Returns are gross of fees

  • Allocation:The allocation effect represents the portion of the portfolio’s excess return attributable to differences in sector weights between the portfolio and the benchmark index.
  • Selection: The selection effect represents the portion of the portfolio’s excess return attributable to differences in the weights of individual securities within each sector between the portfolio and the benchmark index.
  • Interaction: Most complex and sometimes counterintuitive, the interaction effect represents the portion of the portfolio’s excess return attributable to combining sector allocation decisions with security selection decisions, and is often thought of as measuring the accuracy of manager’s convictions.

Please note that the methodology used by our independent third-party attribution software vendor will at times present sector allocation effects that are counterintuitive. For example, the software may calculate a negative sector effect even when the portfolio, on a weighted average basis for the period, was overweight an outperforming sector. Under the vendor’s methodology, allocation effects in recent months may overwhelm the allocation effects from earlier in the period, particularly over longer time frames.

Parentheses around a number indicates a negative number.


Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Bill Miller profile picture
721 Followers
[Note: Bill Miller is not an active contributor to Seeking Alpha, but rather SA editors excerpt from his quarterly letters to clients.] Bill Miller, CFA is the founder of Miller Value Partners, and currently serves as the Chairman and Chief Investment Officer, and co-Portfolio Manager for Opportunity Equity (https://millervalue.com/strategies/opportunity-equity/) and Income Strategy (https://millervalue.com/strategies/income-strategy/). Prior to Miller Value Partners, Bill and his partner, Ernie Kiehne, founded Legg Mason Capital Management and served as portfolio managers of the Legg Mason Capital Management Value Trust from its inception in 1982. Bill took over as sole manager in December 1990 and served in this role for the next 20 years.Bill was the director of research for Legg Mason from October 1981 through June 1985 and assumed overall responsibility for Legg Mason’s equity funds management division in 1990. Prior to joining Legg Mason in 1981, he served as treasurer of the JE Baker Company, a major manufacturer of products for the steel and cement industries.Bill earned his economics degree from Washington and Lee University, where he graduated with honors in 1972. Subsequent to graduation, he served as a military intelligence officer overseas and then pursued graduate studies in philosophy in the Ph.D program at The Johns Hopkins University. He received his CFA designation in 1986.

Additional disclosure: The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. The MSCI US Investable Market Consumer

Discretionary 25/50 Index is a benchmark of large-, mid-, and small-cap U.S. stocks in the consumer discretionary sector. The Russell 2000 Value Index measures the performance of those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values. Unmanaged index returns do not reflect any fees, expenses or sales charges. Active share measures the degree of difference between a fund portfolio and its benchmark index. Basis point is one hundredth of one percent. Compounders are companies with the ability to appreciate over the long term. CPI (Consumer Price Index) is a measure of the average change over time in the prices paid for a market basket of consumer goods and services. Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock and serves as an indicator of a company’s profitability. EBITDA is earnings before interest, taxes, depreciation and amortization and is a calculation of a company’s financial health. EV/EBITDAR compares a company’s enterprise value to its earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs and measures a company’s financial performance. Free cash flow (FCF) is earnings before depreciation, amortization, and non-cash charges minus maintenance capital expenditures. Net Promoter Score (NPS) is a customer loyalty and satisfaction measurement. Earnings growth is not representative of the Fund’s future performance.

Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. The Fund may focus its investments in certain regions or industries, increasing its vulnerability to market volatility. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The manager’s investment style may become out of favor and/or the manager’s selection process may prove incorrect, which may have a negative impact on the Fund’s performance. Short selling is a speculative strategy. Unlike the possible loss on a security that is purchased, there is no limit on the amount of loss on an appreciating security that is sold short.

Morningstar Rankings represent a fund’s total return percentile rank relative to all funds in the same Morningstar Category. The highest percentile rank is 1 and the lowest is 100. It is based on Morningstar total return, which includes both income and capital gains or losses and is not adjusted for sales charges or redemption fees. Past performance does not guarantee future results. Ratings shown for Class I shares only: ratings for other share classes may differ. The Fund was ranked 100%, 98% and 9% among 407, 325, and 217 Morningstar Mid-Cap Blend Funds over the 1-, 5- and 10-year periods as of 6/30/22 based on total returns. ©2022 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

The views expressed are those of the portfolio managers as of the date indicated, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. All data referenced are from sources deemed to be reliable but cannot be guaranteed. Discussions of individual securities are intended to inform shareholders as to the basis (in whole or in part) for previously made decisions by a portfolio manager to buy, sell or hold a security in a portfolio. References to specific securities are not intended and should not be relied upon as the basis for anyone to buy, sell or hold any security. Portfolio holdings and sector allocations may not be representative of the portfolio manager’s current or future investment and are subject to change at any time.

The Miller Value Funds are distributed by Quasar Distributors, LLC.

Before investing, carefully consider a Fund’s investment objectives, risks, charges and expenses. You can find this and other information in each prospectus, or summary prospectus if available, which is available at millervaluefunds.com. Please read it carefully.

©2022 Miller Value Partners, LLC

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