Capital One Rises on Earnings while Alphabet Declines on Disappointing Cloud Revenue
Last week, the Opportunity Equity Strategy's representative account fell -4.24%, underperforming the S&P 500’s -2.52% decline. (Exhibit 1). The strategy ended the week up 5.25% YTD, 341 basis points behind the S&P 500.
Exhibit 1: Performance of Opportunity Equity Representative Account Net of Fees, Versus S&P 500, Through 10/27/231
|Time Period||Opportunity Equity Representative Account||S&P 500|
|Last Week (10/20 - 10/27)||-4.24%||-2.52%|
|Inception (annualized since 6/26/00)||5.78%||6.57%|
Source: Bloomberg, Patient Capital Management.
Capital One Financial Corporation (COF) rose after announcing solid 3Q earnings. Revenue came in at $9.37B vs. $9.19B expected, while EPS came in at $4.45 vs. $3.26 expected. Net interest income (NII) exceeded expectations coming in at $7.4B vs $7.3B expected, while the company saw a greater than expected improvement in capital ratios, as the CET1 ratio rose 30bps to 13.0% vs. 12.4% expected, above the company’s long-term target of 11%. During the quarter, Capital One repurchased $150M worth of shares (~0.1% of shares outstanding). Piper Sandler lowered its price target to $109 from $115 (12% upside), while Morgan Stanley raised its price target to $87 from $86 (-11% downside).
Amazon.com, Inc. (AMZN) rose after the company reported better than expected 3Q results. Revenue of $143.1B and EBIT of $11.2B beat consensus estimates of $141.6B and $7.7B, respectively. The company guided for 4Q revenue of $163.5B at the midpoint, behind consensus at $167B, with EBIT of $9B at the midpoint vs. consensus of $8.7B. Evercore ISI raised its price target to $195 from $190 (53% upside), while Truist raised its price target to $176 from $174 (38% upside).
Alibaba Group Holding Limited (BABA) announced a partership with Chinese video streaming site Bilibili to help expand the site’s e-commerce business for the upcoming “Double 11” shopping festival on November 11th.
Cleveland-Cliffs Inc. (CLF) rose above 50 and 100-day moving averages after reporting 3Q steelmaking revenue of $5.6B vs. consensus of $5.5B with average selling prices in-line with consensus estimates. EBITDA of $614M beat estimates of $604M. FCF of $605M led to a $500M net debt reduction and 3.9M share repurchase at an average price of $15.09. Looking to 4Q, the company continues to expect to deliver a $2B reduction to total steelmaking costs, and also took down CapEx guidance to $670M at the midpoint from $700M previously.
Coinbase Global, Inc. 3.375% due 10/2028 rose following Bitcoin prices higher over the course of the week. Bloomberg’s litigation analysis team reported that Coinbase’s written legal arguments in its suit against the United States Securities Exchange Commission (SEC) are robust and likely to prevail.
Exhibit 2: Significant2 Contributors to Opportunity Equity Representative Account Performance, 10/20/23 - 10/27/23
|Capital One Financial Corporation||Equity||8.3%|
|Alibaba Group Holding Limited||Equity||3.6%|
|Coinbase Global, Inc. 3.375% due 10/1/2028||Fixed Income||4.2%|
Source: Patient Capital Management. See below for additional information.
Alphabet Inc. (GOOGL) fell through the 50 and 100-day moving averages after the company reported 3Q 2023 revenue of $64.1B beating expectations of $63.0B. Google Advertising revenues of $59.6B beat consensus of $58.9B, while Google Cloud missed at $8.4B in revenue vs. $8.6B expected. Adjusted operating income came in short at $21.3B vs expectations for $21.5B, but EPS of $1.55 beat consensus estimates of $1.45. Roth MKM raised its price target to $152 from $146 (24% upside), while Needham raised its price target to $160 from $140 (31% upside).
Mattel, Inc. (MAT) fell through the 200-day moving average after reporting 3Q 2023 results that came in ahead of consensus, while implied guidance for 4Q disappointed. Revenue of $1.9B and EBIT of $506M came in ahead of consensus at $1.8B and $427M, respectively. Management maintained its guidance for revenues in 2023 to be flat Y/Y, with ~47% gross margins from pricing and cost savings, and FCF of at least $400M (6% yield). Implied 4Q EPS guidance of $0.26 came in well below consensus of $0.48, as did EBITDA guidance of $236M vs. consensus of $316M. Mattel repurchased $60M worth of shares in 3Q (~0.7% of shares outstanding). Citi lowered its price target to $24 from $26 (30% upside), while Bank of America lowered its price target to $23 from $25 (25% upside).
General Motors Company (GM) declined due to continued negotiations with the United Auto Workers (UAW) union, though the company reported strong 3Q results. Revenue came in at $44.1B vs. $43.2B expected, while EBIT also exceeded expectations at $3.6B vs. $3.3B expected. EPS of $2.28 beat estimates of $1.84 while FCF of $4.0B beat consensus of $1.6B. As part of the previously announced capital returns program, the company declared a $0.09/share quarterly dividend (1.3% annualized yield) and repurchased $250M of stock. Due to continued uncertainty with the UAW strike, management withdrew FY 2023 guidance and plans to provide an update once its new labor contract is ratified. Citi lowered its price target to $90 from $95 (231% upside), while RBC raised its price target to $48 from $47 (76% upside).
Green Thumb Industries Inc. (GTBIF) announced that its RISE Dispensary subsidiary would open a new location in Sun City Center, Florida – its tenth retail location in the state and 86th nationwide.
IAC Inc (IAC) declined on limited news.
Exhibit 3: Significant2 Detractors from Opportunity Equity Representative Account Performance, 10/20/23 - 10/27/23
|General Motors Company||Equity||-8.0%|
|Green Thumb Industries Inc.||Equity||-15.1%|
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.
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