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Apr 29, 2022

1Q22 Opportunity Equity Quarterly Investment Review

Christina Siegel Malbon

During the first quarter of 2022, the Miller Opportunity Equity net of fees generated a total return of -7.12% excluding sales charges. In comparison, the Strategy’s unmanaged benchmark, the S&P 500 Index, returned -4.60%.

Using a three-factor performance attribution model, selection and interaction effects contributed to the portfolio’s underperformance, which was partially offset by allocation effects. Ovintiv Inc., Cleveland-Cliffs Inc., iShares 20+ Year Treasury Bond ETF P140 1/23, Diamondback Energy Inc., and Splunk Inc. were the largest contributors to performance, while Farfetch Ltd., Meta Platforms, Herbalife Nutrition Ltd., WW International, and General Motors Co. were the largest detractors.

Relative to the index, the Strategy was overweight the Consumer Discretionary, Financials, Energy and Industrials sectors on average during the quarter. With zero allocation to Real Estate and Utilities, the Strategy was dramatically underweight these groups and more moderately underweight the Communication Services, Health Care, Information Technology, Consumer Staples, and Materials sectors.

The portfolio added three positions and eliminated five positions during the quarter, ending the quarter with 41 holdings, where the top 10 represented 39.9% of total assets compared to 29.5% for the index, highlighting Opportunity’s meaningful active share of 90.1%.

Top Contributors

    • Energy companies outperformed in the quarter with both Ovintiv Inc. (OVV) and Diamondback Energy Inc (FANG) becoming top contributors with returns of 60.76% and 27.92%, respectively. The stocks followed crude oil prices higher benefiting from the tightness in supply. Ovintiv reported 4Q results that missed consensus due to unexpected pipeline outages in the Montney Basin in British Columbia, driven by ongoing litigation over land use rights with local indigenous tribes in the region. The company reported Earnings Before Income, Taxes, Depreciation, and Amortization (EBITDA) of $786M below the Street at $928M with free cash flow (FCF) coming in at $320M versus consensus expectations of $439M. The company increased their quarterly dividend to $0.20/share, yield of 1.5%, and repurchased 4.3M shares to date since the beginning of 4Q21 (1.2% of shares outstanding). Ovintiv paid down $2.3B in debt over the course of 2021, and thus, regained an investment-grade credit rating. The company remains on track to achieve its target of $3B in debt by 2nd half of 2022, after which it will start returning 50% of FCF after base dividends to shareholders. After posting four consecutive quarters of profitability, Ovintiv is now eligible for S&P equity index inclusion. At $85 WTI crude, the company expects to generate $2.9B in FCF in 2022 (19.3% FCF yield).

Diamondback reported strong 4Q results beating on the top and bottom line. The company reported revenue of $2.1B beating consensus of $1.7B with earning per share (EPS) of $3.63 beating expectations of $3.37. The beat was driven by a combination of higher volumes, higher realizations, and efficiency gains. Diamondback redeemed $650M of 0.9% 2023 bonds in November, and now has no debt maturities until 2024. The company raised its quarterly dividend to $0.60/share, yield of 1.8%, while repurchasing 3.8M shares (2.2% of shares outstanding), representing 67% of 4Q FCF (above management’s 50% commitment). At $90 WTI crude, the company expects to generate $4B in FCF in 2022 (16.1% FCF yield).

    • Cleveland-Cliffs Inc. (CLF) rose 63.86% during the quarter benefitting from the rebound in steel prices. CLF reported Q4 steelmaking revenue of $5.19B (total revenue of $5.35B) and EBITDA of $1.46B, both below consensus driven by lower shipments (3.38 metric tons (mt) versus estimates of ~3.75mt) as demand from auto Original Equipment Manufacturers (OEM) and service centers remained weak due to supply chain constraints. The company’s board of directors approved a new $1B share repurchase program (6% of shares outstanding) to capitalize on what it views as the market’s “lack of understanding” in its now vertically integrated business model. The company was able to increase the price on its fixed contracts renewals guiding for 2022 average selling price of $1,225 mt.

Top Detractors

    • Farfetch Ltd (FTCH) fell 55.31% during the quarter after missing 4Q and full-year results. The company reported Q4 revenue of $666M (+23% year-over-year (YOY)) coming in below consensus of $672M with adjusted EBITDA of $36.1M missing expectations of $38.8M while FCF beat expectations at $83M versus $71M expected. The company guided for 2022 Digital Gross Merchandise Value (GMV) growth of 28-32% YOY surprising consensus at 28%; however, EBITDA margin guidance missed at 1-2% versus consensus at 3.3%. Early in 1Q2022 the company announced the acquisition of Violet Grey, the upscale cult beauty retailer, ahead of its beauty launch expected in 2Q22. The company also announced a new agreement for NGG to be the operating partner for Reebok in Europe following ABG’s acquisition.

    • Meta Platforms, Inc. (FB) fell after reporting mixed results and providing soft 1Q guidance. The company reported revenue of $33.7B beating expectations of $33.4B while operating income disappointed coming in at $12.6B versus $13.2B expected leading to an EPS miss of $3.67 versus $3.85 expected. Both monthly active users (MAUs) and daily active users (DAUs) missed expectations with MAUs of 2.91B versus 2.95B expected and DAUs of 1.93B versus 1.95B expected. The company guided for 1Q revenue of $27-29B below consensus of $30.2B but lowered full-year total expenses to $90-95B from $91-97B previously while keeping CAPEX guidance unchanged. The company expects to continue to be impacted by iOS changes, resulting in a negative $10B impact for the full year. The report also highlighted the losses coming from Facebook Reality Labs (FRL), which comprises their “augmented and virtually reality” business, coming in at $10.2B in losses in 2021 with expectations for this loss level to increase in 2022 given increased investments. The company repurchased $19B in stock during the quarter (2% of shares outstanding) and has $39B remaining on its buyback program (6% of shares outstanding).

    • Herbalife Nutrition Ltd (HLF) fell during the quarter on cost input inflation concerns, and demand impact from exposure to Russia and Eastern Europe. The company reported Q4 adjusted EPS of $0.57 vs. consensus expectations $0.64 on revenues that fell -6.5% YOY vs. consensus of -3.5%. The company repurchased $102M worth of shares in Q4, representing 2.2% of shares outstanding. Despite the miss on the quarter, the company issued 2022 guidance that surprised on the topline but missed on the bottom line. Revenue is expected to grow 0-6% YOY (vs expectations for 0.5%), adjusted EBITDA will be in the range of $785-845M (vs $865M expected) and adjusted EPS will come in at $4.25-4.75 (vs $4.63 expected). The guidance assumes the repurchase of $200M worth of shares during the year, representing 5% of the shares outstanding at current prices.

Top Contributors and Top Detractors
Top Contributors Ticker Return Contribution (basis points)
Ovintiv Inc OVV 60.76% 164
iShares 20+ Year Treasury Bond ETF P140 1/23 TLT P140 1/23 99.19% 118
Cleveland-Cliffs Inc CLF 63.86% 100
Diamondback Energy Inc. FANG 27.92% 97
Splunk Inc SPLK 28.34% 83
Top Detractors Ticker Return Contribution (bps)
Farfetch Ltd FTCH -55.31% -161
Meta Platforms Inc. FB -33.73% -123
WW International Inc. HLF -25.82% -88
WW International Inc. WW -36.60% -82
General Motors GM -25.39% -76

Performance Attribution

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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. Parentheses indicate a negative number.
*Returns based on underlying portfolio equity long holdings for each sector.
• 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.
• 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.
• 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.

Related Posts

Samantha McLemores's 1Q 2022 Opportunity Equity Commentary

Christina Siegel’s 1Q 2022 Market Highlights

For important additional information on Opportunity Equity strategy performance, please click on the Opportunity Equity GIPS Composite Disclosure. This additional information applies to such performance for all time periods.

Contact Miller Value Partners to obtain information on how Top Contributors and Top Detractors were determined and/or to obtain a list showing every holding’s contribution to Strategy performance.

The views expressed in this report reflect those of the Miller Value Partners strategy’s portfolio manager(s) as of the date published. Any views are subject to change at any time based on market or other conditions, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results.

©2022 Miller Value Partners, LLC