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Aug 22, 2023

Opportunity Equity Strategy Update for 8/11/2023 - 8/18/2023

William Keenan

Energy Transfer Rises on Crestwood Acquisition while Farfetch Falls on Earnings

Last week, the Opportunity Equity Strategy's representative account declined -5.70%, underperforming the S&P 500’s -2.05% fall. (Exhibit 1). The strategy ended the week up 19.19% YTD, 417 basis points ahead of the S&P 500.

Exhibit 1: Performance of Opportunity Equity Representative Account Net of Fees, Versus S&P 500, Through 8/18/231

Time Period Opportunity Equity Representative Account S&P 500
Last Week (8/11 - 8/18) -5.70% -2.05%
MTD -11.93% -4.66%
QTD -4.95% -1.60%
YTD 19.19% 15.02%
1 Year -2.55% 3.76%
5 Year 0.64% 10.83%
10 Year 7.79% 12.30%
Inception (annualized since 6/26/00) 6.40% 6.89%
Source: Bloomberg, Patient Capital Management.

Energy Transfer LP (ET) rose above the 50-day moving average after the partnership announced it would acquire Crestwood Equity Partners in an all-equity transaction valued at $7.1B, including the assumption of $3.3B in debt. After the transaction was announced, S&P raised its issue-level rating of Energy Transfer’s senior unsecured debt to BBB from BBB-, maintaining its stable outlook.

Uber Technologies Inc (UBER) rose above the 50-day moving average. Loop Capital raised its price target to $58 from $48 (30% upside), while Wells Fargo raised its price target to $59 from $53 (32% upside).

Precigen, Inc. (PGEN) continued to rise after announcing it had received approval from the FDA to use its Phase ½ single arm study of PRGN-2012 in recurrent respiratory papillomatosis (RRP) for accelerated approval. Filings revealed during the week company insiders, including Executive Chairman Randal J. Kirk, purchased over 1.4M shares for ~$2.4M.

Chesapeake Energy Corporation (CHK) rose after the company announced an agreement to sell its remaining Eagle Ford oil assets to SilverBow Resources for $700M. Chesapeake expects to use the proceeds from the transaction to fund further deleveraging and share repurchases. UBS raised its price target to $106 from $102 (23% upside).

Cleveland-Cliffs Inc. (CLF) rose after the company disclosed an offer to purchase US Steel for $32.50 per share in cash and stock. Later in the week, Cleveland-Cliffs announced it had received an exclusive assignment of right to bid from the United Steelworkers’ union (USW). The company has also agreed to assume, upon the potential acquisition of US Steel, all of the agreements between US Steel and the USW applicable to US Steel employees.

Exhibit 2: Significant2 Contributors to Opportunity Equity Representative Account Performance, 8/11/23 - 8/18/23

Name Type Net Return
Energy Transfer LP Equity 1.9%
Uber Technologies Inc Equity 2.2%
Precigen, Inc. Equity 3.9%
Chesapeake Energy Corporation Equity 1.9%
Cleveland-Cliffs Inc. Equity 1.8%
Source: Patient Capital Management. See below for additional information.

Farfetch Limited (FTCH) fell through the 50-day moving average after reporting 2Q 2023 results that significantly disappointed. The company reported Total Gross Merchandise Value (GMV) of $944M vs $943M for the street (up 6.9% y/y), while revenue of $572M missed consensus at $649M (down -1.3% y/y). Take rate also missed at 31.8% vs. 32.5% expected, and total customers grew 7% y/y to 4.1M in-line with consensus. On profitability, EBITDA missed at -$31M vs. estimates of -$11M. The company aggressively lowered its full year guidance with GMV of $4.4B from $4.9B previously, digital GMV of $3.85B down from $4.2B previously, brand GMV of $450M vs $600M previously, and adjusted EBITDA of up to 1% from 1-3% previously. Farfetch continues to guide for a return to being FCF positive on a full year basis. Credit Suisse lowered its price target to $10 from $12 (283% upside), while Cowen lowered its price target to $3.50 from $6 (19% upside). S&P affirmed its B- rating and negative outlook for the company.

OneMain Holdings, Inc. (OMF) fell through the 100 and 200-day moving averages. The company also completed a $1.4B personal loan securitization, its second of 2023, in a significantly upsized offering previously planned at $750M. OneMain reported July trust data that showed net charge-offs (NCOs) down -3bp M/M to 4.21%. Early-stage delinquencies (DQs) of 1.22% rose 17bps sequentially, while late-stage delinquencies of 1.40% rose 9bps sequentially. Jefferies highlighted above-average DQ levels are likely due to a delayed tax season, while NCOs continue to track in-line with management guidance of 7-7.5%.

Alibaba Group Holding Limited (BABA) fell through the 50, 100, and 200-day moving averages despite reporting solid FY1Q earnings during the previous week. Total revenue of ¥234.2B (14% y/y) beat consensus expectations of ¥224.2B, with adjusted EBITDA of ¥52.1B beating consensus of ¥44.8B leading to EPS of ¥17.37 beating expectations at ¥14.15. Cloud revenue grew 42% y/y to ¥25.1B versus consensus of 3% y/y. During the quarter, Alibaba repurchased 35.6M ADSs for $3.1B, or $87.08 per ADS (1.3% of shares outstanding). As of March 31, the company had $16.3B remaining on its share repurchase authorization through March 2025, enough to repurchase 185M ADS at current prices (~7.2% of shares outstanding). Truist raised its price target to $135 from $130 (53% upside), while HSBC raised its price target to $142 from $131 (61% upside).

Delta Air Lines, Inc. (DAL) announced a $500M capital infusion into on-demand private aviation service Wheels Up, in partnership with Certares Management and Knighthead Capital Management. The lenders will receive newly issued common stock in the company, accounting for approximately 95% of the fully diluted equity upon closing. As part of the transaction, Delta CFO Dan Janki was named Chairman of Wheels Up.

IAC Inc (IAC) fell through the 100 and 200-day moving averages after announcing disappointing 2Q results during the previous week.

Exhibit 3: Significant2 Detractors from Opportunity Equity Representative Account Performance, 8/11/23 - 8/18/23

Name Type Net Return
Farfetch Limited Equity -48.3%
OneMain Holdings, Inc. Equity -8.9%
Alibaba Group Holding Limited Equity -8.0%
Delta Air Lines, Inc. Equity -6.1%
IAC Inc Equity -7.5%
Source: Patient Capital Management. See below for additional information.

As of prior week's market close unless otherwise stated.

1The performance figures for the representative Opportunity Equity account reflect the deduction investment management fees and certain other expenses. Returns greater than 1 year are annualized.

Patient Capital Management, LLC completed its acquisition of the Opportunity Equity Strategy from Miller Value Partners, LLC on May 26, 2023. Patient Capital Management served as the investment adviser to the Opportunity Equity Strategy for the majority of the week referenced herein. Additionally, prior versions of this weekly blog posting refer to Miller Value Partners as investment adviser to the Opportunity Equity Strategy.

For additional information about Opportunity Equity Strategy performance, please click on the Opportunity Equity Strategy Composite Performance Disclosure. Past performance is no guarantee of future results.

2Significant Contributors and Detractors are based on holdings that had the greatest effect on representative account performance for the week. Holdings that have been in the portfolio since the end of the most recent calendar quarter are identified by name. The net return shown above for each individual security represents the change in market price of the security during the week, according to a third-party pricing service, or for the partial period held in the portfolio during the week.  Net returns also include any purchases or sales that were made during the week. For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact us.

Any views expressed are subject to change at any time, and Patient Capital Management disclaims any responsibility to update such views. There is no guarantee that market trends discussed herein will continue. 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, and there is no guarantee dividends will be paid or continued. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice. Content may not be reprinted, republished or used in any manner without written consent from Patient Capital Management. 

©2023 Patient Capital Management, LLC