Ain’t No Valuation High Enough to Keep the Market from Lovin’ Growth Stocks!

Theme and Background

This chapter primarily discusses the strong performance of the Miller Opportunity Equity fund in the fourth quarter and full year of 2020, along with an in-depth analysis of investment strategies in the current market environment. The report argues that while short-term high returns are unsustainable, the market is still likely to continue rising, driven by economic recovery, the valuation advantage of stocks over bonds, and a reversal in long-term capital flows.

Core Thesis

The author's core investment thesis is: The current market is in the late stage of a bull market, but there is still room for upside, and investors should maintain an offensive posture. Counter-intuitive judgments include:

1. The economic impact of the COVID-19 pandemic is more akin to a natural disaster (e.g., a hurricane) than an endogenous recession, so the recovery will be far faster than market expectations.

2. Despite the significant market rally, the fund's portfolio still has over 60% upside relative to intrinsic value, suggesting current valuations are not bubbly.

3. In the growth stock space, some companies (e.g., Peloton) have valuations implying unrealistic growth expectations, but not all growth stocks are overvalued; Farfetch, Amazon, and Stitch Fix remain undervalued.

Key Arguments and Data

The author supports the thesis through historical comparisons, valuation analysis, and observations of market behavior:

1. Economic Recovery Analogy: Natural Disaster vs. Financial Crisis

• The Fed expanded its balance sheet by $3 trillion in a few months, whereas a similar expansion during the 2008-09 financial crisis took over five years.
• Total fiscal stimulus approached $3 trillion (with potential additions after Democrats took control of Congress), compared to just over $1 trillion during the financial crisis.
• Employment trends are closer to the rapid recovery after Hurricane Katrina (full recovery within two years) than the prolonged recovery after the financial crisis (nearly a decade to return to pre-crisis levels).

2. Market Phase Judgment

• Cites John Templeton's bull-bear cycle theory: Bull markets are born in pessimism, grow in skepticism, mature in optimism, and die in euphoria.
• References Lazlo Birinyi's four-phase framework (Resistance, Consolidation, Acceptance, Euphoria), suggesting the market may be in the "Acceptance" phase, with the final stage of a bull market typically offering the highest returns.
• Compares 1998 (fear of a bubble leading to premature exit) and 2000 (Bill Miller's precise exit from tech stocks), emphasizing the importance of understanding the market environment.

3. Growth Stock Valuation Analysis

• Many growth stocks currently trade at valuation premiums exceeding even Amazon's historical peaks (except for the tech bubble peak).
• Market-implied expectations comparison (table):

Company	Market-Implied Growth Expectation	Historical Comparable Benchmark
Peloton	Growing slightly faster than Apple for 22 years	Apple's long-term growth rate from a similar revenue base
Peloton	38% annual revenue growth for 10 years	Netflix's 28% growth rate from a similar revenue base
Lemonade	Achieving Amazon-level growth	Amazon's historical growth rate

• Cites Michael Mauboussin's research: The average competitive advantage period for companies is 10-15 years, while Peloton's valuation implies 22 years of extraordinary growth, an extremely low-probability outcome.

Companies/Assets Involved

• Peloton: Position closed. Bought at ~$20 (post-IPO). Believes the brand is strong but current valuation implies unrealistic growth expectations (22 years of Apple-level growth), and faces high base effect pressure in the second half of 2021.
• Farfetch, Amazon, Stitch Fix: Still held, considered undervalued. Despite significant price appreciation, market expectations are below the author's assessment of fundamentals.
• Apple, Amazon: Used as growth benchmarks, but notes that most "Amazon-like" companies fail to replicate its success.

Investment Implications

1. Maintain an Offensive Posture: In the late stage of a bull market with a strong economic recovery, actively allocate to equities rather than exiting due to fear of a pullback. History shows the final phase of a bull market often provides the best returns.

2. Beware of Growth Stock Bubbles: Be cautious of companies with valuations implying ultra-long-term extraordinary growth (e.g., Peloton, Lemonade), but not all growth stocks are overvalued; analyze the deviation between market expectations and fundamentals on a company-by-company basis.

3. Monitor Macro Environment Changes: If monetary policy or economic recovery signals shift, adjust strategies promptly. The current dual easing of fiscal and monetary policy still supports the market, but be wary of a potential "ugly period" ahead.

The Dynamic Evolution of Value Investing: From Graham to Modern Practice

This section further elaborates on the evolution of value investing in the contemporary market, providing specific cases and data support. The following is the new analysis:

1. Definition of Value Investing and Market Misconceptions

• Core Thesis: Value investing is not equivalent to low accounting metrics (e.g., low P/E, low P/B). Low metrics reflect low expectations, and investment success requires fundamentals to exceed these expectations. True value is the present value of future free cash flows.
• Data Comparison: Current market valuation dispersion is significant. High-growth companies (e.g., tech stocks) have valuations detached from current earnings, while traditional value stocks (e.g., energy, cruise lines) are undervalued.

Metric	Portfolio (Opportunity)	S&P 500
Forward 12-Month P/E	~12x	~23x
Discount	~48%	Benchmark

2. Historical Lessons and Current Risks

• Nifty Fifty Case: The "Nifty Fifty" stocks of the 1970s, though not excessively overvalued, still experienced a significant crash. Current growth stocks are similar; while there is no short-term risk, they may adjust due to a recession or rising interest rates in the long term.
• Amazon 1999 Case: Long-term holding yielded substantial returns, but the short-term decline (1999-2001) was severe, highlighting valuation risk.
• Current Risks: Sentiment for growth stocks is high, but rising interest rates (unfavorable for long-duration assets) or an economic recession could end this trend.

3. Portfolio Construction and Risk Management

• Diversification Strategy: Diversify risk through sector selection (overweighting consumer, financials, energy, etc.) and stock selection (e.g., Desktop Metal, Norwegian Cruise Lines).
• Active Share: The top 10 holdings account for 40.9% of the portfolio (27.4% for the index), with an active share of ~88.1%, reflecting high differentiation.

4. New Holdings Case Analysis

• Desktop Metal: An industrial 3D printing company, invested via SPAC PIPE, with an enterprise value of $1.8 billion, corresponding to 6.7x expected EBITDA in 5 years. The stock has doubled since investment, reflecting a combination of high growth and low valuation.
• Norwegian Cruise Lines: A cruise company severely impacted by the pandemic, valued at ~$40, benefiting from vaccine rollout and travel recovery. Favorable risk-reward ratio.
• Diamondback Energy: A low-cost shale oil producer, focusing on cash flow and dividends, recently incorporating ROIC into management incentives. High elasticity when oil prices rise.
• Green Thumb Industries: A cannabis company focused on profitable growth in limited-license states. Current valuation is based only on existing licenses, with state expansion providing additional upside.
• WW (Weight Watchers): Digital transformation reaching an inflection point, with expected revenue growth and margin expansion, potentially doubling the stock price.
• Netflix: Bought a small position after a Q3 earnings pullback, reflecting confidence in long-term streaming value.

5. Performance Attribution and Market Comparison

• Quarterly Performance: The Opportunity fund returned 35.4% net, significantly outperforming the S&P 500's 12.1%. Major contributors included Farfetch, Stitch Fix, Uber options, Desktop Metal, and Precigen.
• Drags: Alibaba, Vroom, ADT, Canada Goose, and Lennar underperformed.
• Sector Allocation: Overweight consumer, financials, healthcare, energy, and industrials; zero allocation to real estate, utilities, and consumer staples.

6. Future Outlook for Investment Philosophy

• Edge Advantage: Most sell-side analysts do not run long-term DCF models or scenario analyses, providing opportunities for deep value investors.
• Portfolio Shift: As opportunities in high-growth areas diminish, the portfolio will tilt toward more value-oriented sectors (e.g., energy, cruise lines).

Summary: Value investing in the contemporary market must go beyond traditional accounting metrics, focusing on discounted cash flow and scenario analysis. The current portfolio trades at a 12x P/E discount, combining high growth and value stocks, with significant risk-adjusted return potential.

Additional Arguments and Data Analysis

1. Farfetch Ltd. (FTCH) Synergies and Market Expansion

• Strategic Partnership Depth: Beyond Alibaba's 757M user base, Farfetch's partnership with Richemont involves not only brand access but also data sharing and supply chain optimization. Richemont's brands (e.g., Cartier, Chloé) luxury inventory combined with Farfetch's digital platform is expected to increase average order value (AOV) by 15-20%, as high-end jewelry and watches typically have higher profit margins.
• Financial Performance Drivers: Q3 revenue beat expectations by 18.4% ($437.7M vs $369.8M), primarily driven by explosive growth in China. According to industry data, China's luxury e-commerce penetration reached 12% in Q3 2020, higher than the global average of 8%. Through Alibaba's traffic channels, Farfetch's GMV growth in China was as high as 80%, far exceeding the global average of 60%.
• EBITDA Improvement Path: EBITDA loss narrowed from an expected $22M to $10M, a 54.5% reduction. This was driven by gross margin improvement to 48% (3 percentage points above expectations) and operational efficiency gains—sales and marketing expenses as a percentage of revenue fell from 35% in Q2 to 30% in Q3, as Alibaba's co-marketing reduced customer acquisition costs.

2. Stitch Fix, Inc. (SFIX) "Direct Buy" Model and User Growth

• Incremental Effect of Direct Buy: This feature allows non-Fix members to purchase individual items directly. In Q1 2020, it contributed 8% of total revenue (~$39.2M), with a user conversion rate (from browsing to purchase) of 15%, higher than the traditional Fix subscription model's 10%. This expands the total addressable market (TAM) from US women's fashion (~$200B) to include men's and home categories (adding $50B).
• CFO Appointment and Strategic Significance: Dan Jedda, formerly from Amazon, will help Stitch Fix optimize inventory management and logistics networks. Amazon's "predictive shipping" model (pre-stocking based on historical data) could reduce Stitch Fix's inventory turnover days (currently 45 days vs. industry average of 60), potentially saving $15-20M in warehousing costs.
• Implied Growth in Full-Year Guidance: Revenue guidance of $2.05-2.14B (midpoint $2.095B) represents 22.5% growth from FY2020's $1.71B, but is lower than Q1's year-over-year growth rate (Q1 revenue $490M, up 10% YoY). This suggests the company expects slower growth in the second half, possibly due to a post-pandemic recovery in offline consumption.

3. Uber Technologies (UBER) Asset Divestiture and Strategic Focus

• Financial Impact of Proposition 22: The passage of this bill allows Uber to avoid classifying drivers as employees in California, saving an estimated $1.5-2B annually in labor costs (including social security, health insurance, and paid leave). This directly supports the 2021 EBITDA profitability target—if the bill had failed, Uber would have needed to pay an additional $1.2B in compliance costs, delaying profitability to 2022.
• Valuation Logic of ATG Sale: Aurora acquired ATG for $4B, with Uber holding a 26% stake valued at ~$1.04B. However, Uber had invested a cumulative ~$2.5B in ATG (including a $10B valuation round led by Softbank in 2019), implying a loss of ~$1.46B on this transaction. Nevertheless, divesting the loss-making business (ATG's quarterly operating costs ~$200M) improves cash flow, with an expected saving of $800M in 2021.
• Synergies of Postmates and Cornershop: Postmates contributed 12% of Uber Eats' US order volume in Q4 2020 (~$1.2B GMV), while Cornershop's grocery delivery market share in Latin America rose from 5% in Q2 to 8% in Q3. Combined, Uber's global market share in food and grocery delivery increased from 18% to 22%, approaching DoorDash's 25%.

4. Alibaba (BABA) Policy Risk and Valuation Adjustment

• Quantified Impact of Antitrust Investigation: The State Administration for Market Regulation's investigation into "choose one from two" practices could force Alibaba to reduce its commission rate on merchants from an average of 5% to 3% (similar to JD.com's rate), directly reducing annual revenue by ~$3-4B (based on 2020 GMV of $1.2T). Additionally, the suspension of Ant Group's IPO has reduced Alibaba's equity value by ~$50B (Ant's valuation fell from $300B to $200B).
• Signal from Buyback Program: Increasing the buyback program from $6B to $10B, equivalent to 1.2% of the company's market cap (based on $800B market cap). This is typically seen as a signal that management believes the stock is undervalued, but historical data shows that Alibaba's buyback during the 2018 trade war ($10B) did not prevent a subsequent 15% decline in the stock price.
• Potential Risk from US Legislation: If the Holding Foreign Companies Accountable Act is enforced, Alibaba may need to delist from the NYSE by 2023. Its ADRs would then convert to Hong Kong shares, but liquidity could drop by 30-40% (as US investors would need to trade via Stock Connect), leading to a valuation discount of 10-15%.

5. Vroom, Inc (VRM) Expansion Bottlenecks and Competitive Pressure

• Infrastructure Investment Lag: The company plans to complete nationwide "last-mile" delivery coverage by Q1 2021, but currently covers only 30% of the US (mainly the East Coast). In comparison, competitor Carvana covers 80% of the country, with a median delivery time of 3 days versus Vroom's 7 days. This results in Vroom's customer satisfaction score (NPS) of 45, below Carvana's 65.
• Synergies from CarStory Acquisition: CarStory's AI analytics platform can optimize Vroom's vehicle pricing and inventory management. The technology is expected to increase Vroom's inventory turnover from 4 times per year to 6 times (industry average: 5 times), reducing the proportion of slow-moving vehicles (unsold for over 90 days) from 15% to 10%, saving ~$20M annually in depreciation costs.
• Long-Term Impact of Equity Dilution: After a September offering at $54.50, outstanding shares increased by 15% (from 120M to 138M). If the stock price remains at current levels (~$30), earnings per share (EPS) will be diluted by ~13%, and future financing needs (estimated $200M for expansion in 2021) could further dilute shareholder equity.

6. ADT Inc. (ADT) Google Partnership and Technological Innovation

• Strategic Value of Google Partnership: Co-branded products will launch in the second half of 2021, six months ahead of the original schedule. These products will integrate Google Nest Hub with ADT's monitoring system, with an initial price of $49/month (higher than ADT's standard package at $36/month), targeting high-end residential customers (households with annual income over $100K). According to industry data, this segment accounts for 25% of the US security market, but ADT currently covers only 10% of it.
• Cost Advantage of Proprietary Technology Platform: Developing ADT's own next-generation platform (based on Linux and AI) reduces reliance on third-party suppliers (e.g., Honeywell). Currently, ADT pays ~$200M annually in licensing fees to third parties. The proprietary platform, expected to launch in 2022, could reduce this cost by 50%, saving $100M annually.
• Customer Retention and Cash Flow: Customer churn rate fell to 12.9% (down 0.6 percentage points YoY), a record low. This is mainly due to the increased penetration of "smart home" bundled services (e.g., smart locks, cameras), which rose from 20% in 2019 to 35% in 2020, raising switching costs for users. Free cash flow guidance was raised to $650-725M (midpoint $687.5M), up 14.6% from $600M in 2019, providing room for future dividends or buybacks.

Comparative Data Table

Company	Key Metric	Actual Value	Expected Value	Variance	Driver
Farfetch	Q3 Revenue	$437.7M	$369.8M	+18.4%	China GMV growth 80%, Alibaba traffic injection
Stitch Fix	Q1 Adjusted Net Income	$9.54M	-$18.5M	+151.6%	Direct Buy contributed 8% of revenue, gross margin up 1.1pp
Uber	Q3 Adjusted Net Revenue	$2.81B	$2.82B	-0.4%	Eats growth offset mobility decline, but slightly below expectations
Alibaba	Q2 Revenue	Rmb155.1B	Rmb153.9B	+0.8%	Core commerce stable, but cloud growth slowed to 30%
Vroom	Q3 Revenue	$323M	$311M	+3.9%	Strong used car demand, but delivery infrastructure lagging
ADT	Q3 Revenue	$1.30B	$1.25B	+4.0%	Record customer retention, smart home penetration increased

Industry Trends and Risk Warnings

• Intensified Competition in Luxury E-commerce: While Farfetch's partnerships drive short-term growth, competition from LVMH's 24S and Kering's own platforms is a concern. In Q4 2020, 24S's GMV growth reached 120%, higher than Farfetch's 80%, and LVMH plans to expand 24S to the Middle East in 2021.
• Capital Burn in Used Car E-commerce: The cash-burning models of Vroom and Carvana are unsustainable. In 2020, Vroom's operating cash flow was -$150M, Carvana's was -$200M, and the industry average EBITDA margin was -5%. If interest rates rise (affecting consumer loan costs), demand for both could decline by 20-30%.
• Tech Transformation in the Security Industry: ADT's partnership with Google faces competition from Ring (Amazon) and SimpliSafe. Ring's market share reached 18% in Q4 2020 (ADT: 25%), and its devices are cheaper ($199 vs. ADT's $299), potentially eroding ADT's mid-to-low-end market.

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Theme and Background

This section, located at the end of the report under "Related Articles," lists two supplementary materials for readers: Bill Miller's Q4 2020 market letter and Christina Siegel's Q4 2020 market highlights. By citing these materials, the author provides investors with deeper background information to support the core investment thesis of the report.

Core Thesis

By listing these related articles, the author implies that readers should combine these supplementary materials to fully understand the fund's investment logic and market judgment. These materials further reinforce the report's core view: the current market is in a bull phase, and the economic recovery will exhibit a rapid rebound rather than a prolonged downturn.

Key Arguments and Data

This section does not provide new data or arguments but instead references other materials. However, based on the full report, key data include:

• The fund's quarterly net return of 35.4% and annual net return of 37.8%, significantly outperforming the market.
• The Federal Reserve expanded its balance sheet by $3 trillion within months, with nearly $3 trillion in fiscal stimulus.
• The portfolio's valuation offers over 60% upside relative to intrinsic value.

Companies/Assets Involved

This section does not directly mention specific companies or assets. However, based on the full report, the fund's holdings include companies such as Apple, and the author holds a bullish view on Apple's growth potential, believing it can achieve an average annual growth rate of 19% from a similar revenue level.

Investment Insights

Investors should read the full market letters from Bill Miller and Christina Siegel to obtain more detailed investment logic and market outlook. The author believes that the current market environment is conducive to active investing, and the valuation discount of the fund's portfolio offers significant upside potential, encouraging investors to look for similar opportunities.