Patient Capital Management is a Baltimore asset manager founded in 2020 by Samantha McLemore, CFA — Bill Miller's long-time co-manager (working together since 2002, running the flagship Opportunity Equity strategy since 2014). Continuing the Miller-school contrarian tradition, it practices "time arbitrage": exploiting behavioral mispricing to concentrate in controversial growth names (tech, healthcare, Bitcoin-related) at deep discounts to intrinsic value. Its site preserves Bill Miller's complete 1995-2022 market letters, alongside ongoing quarterly letters and webinars.
This report argues that the market may be shifting from high-growth stocks (like tech companies) to classic value stocks (like energy and finance). For regular investors, this means risky growth stocks that lose money are becoming more dangerous, while companies that generate steady cash and pay dividends (like Ovintiv) could be better bets. The author lost money in 2021 but believes this shift is good long-term. It's worth reading because it uses real examples (like Peloton dropping 80%) to explain why you should be cautious with growth stocks now.
Patient Capital's Opportunity Equity 4Q 2021 Letter discusses the reasons behind the fund's underperformance in 2021 and its long-term strategy. The core argument is that for the full year 2021, the Miller Opportunity Equity net return fell by 4.13%, significantly underperforming the S&P 500's 28.71
This chapter discusses the reasons behind the underperformance of Patient Capital’s Miller Opportunity Equity in 2021 and its long-term strategy adjustments. The author argues that the market is shifting from the disruptive innovation leaders of the past decade toward classic value stocks, a potential transition that may accelerate due to rising interest rates.
The author’s core investment thesis is: The market may be in the early stages of a rotation from high-growth, high-valuation growth stocks to classic value stocks, and the prevailing skepticism toward value investing actually strengthens this conviction. Counterintuitive judgments include: despite the fund significantly underperforming its benchmark in 2021 (-4.13% vs. S&P 500 +28.71%), the author believes the portfolio holds substantial potential over a five-year horizon; meanwhile, the sharp decline of pandemic beneficiaries like Peloton (down over 80% from its peak) is not anomalous but a normal market feature of mean reversion.
1. Historical Performance Comparison: The fund’s 10-year annualized return of 18.29% outperformed the benchmark by 174 basis points; however, its net return for the full year 2021 was -4.13%, far below the S&P 500’s 28.71%.
2. Peloton Case: The stock price fell over 80% from its peak to $31.33, near its IPO price of $29. The author sold around $100 at the end of 2020, believing the risk-reward ratio had deteriorated; the current price has rekindled interest, but market sentiment toward loss-making companies remains extremely negative.
3. Farfetch Case: The stock price fell over 60% from its peak to $27.20, but it is expected to achieve EBITDA profitability in 2021 and positive free cash flow in 2022. The fund has reduced its position but retains long-term confidence.
4. Interest Rate Sensitivity: The author stress-tested all holdings under a scenario where the risk-free rate rises to 3% (not a forecast). Current low rates can support high valuations, but rising rates will trigger painful adjustments.
5. Classic Value Exposure Change: The fund’s gross exposure to classic value stocks increased from 44% a year ago to 62%.
Comparative Data Table:
| Metric | Miller Opportunity Equity | S&P 500 |
|---|---|---|
| 2021 Net Return | -4.13% | +28.71% |
| 10-Year Annualized Return (as of 12/31/2021) | 18.29% | 16.55% |
| Rolling 3-Year Avg Annualized Return (Since Inception) | 9.21% | — |
| Rolling 5-Year Avg Annualized Return (Since Inception) | 8.56% | — |
| Rolling 10-Year Avg Annualized Return (Since Inception) | 7.06% | — |
1. Increase Allocation to Classic Value Stocks: The fund has raised its classic value exposure from 44% to 62%, suggesting investors focus on companies with strong free cash flow generation and high shareholder returns (e.g., Ovintiv).
2. Beware of High-Valuation Growth Stocks: Market tolerance for loss-making companies has been exhausted, and rising interest rates will exacerbate the adjustment. The author believes Peloton’s crash is not the end, and many loss-making companies may continue to face pressure.
3. Monitor Interest Rate Sensitivity: If the risk-free rate rises to 3%, current high-valuation growth stocks will face revaluation. Investors should assess the downside risk of their holdings in a rising-rate scenario.
4. Seize Mean Reversion Opportunities: Pandemic beneficiaries (e.g., Farfetch) face year-over-year pressure but are nearing an inflection point in profitability; investors can watch for valuation recovery as free cash flow improves.
Aftershocks of earthquakes are typically about 1-2 orders of magnitude weaker than the mainshock (according to the Gutenberg-Richter law, aftershocks are on average 1.2 magnitude lower). By analogy in financial markets, aftershocks following the 2008 financial crisis (e.g., the 2010 Flash Crash, the 2011 European debt crisis) caused maximum drawdowns of about 16-19% in the S&P 500, far below the 57% in 2008. After the 2020 COVID-19 shock, the high inflation and rate hike pressures faced by markets in 2022 can be seen as an “aftershock,” but the S&P 500’s drawdown from its 2022 peak was about 25%, still below the 34% decline in 2020. This supports the argument that “aftershocks are not severe.”
| Metric | March 2020 | January 2022 | Change |
|---|---|---|---|
| US Daily New Cases (7-day avg) | ~20,000 | ~800,000 (Omicron peak) | +4000% |
| US Vaccination Rate (Fully Vaccinated) | 0% | ~63% | From 0 to majority |
| US Hospitalization Rate (per 100k) | ~10 | ~30 (Omicron period) | +200% |
| US Mortality Rate (per 100k) | ~0.5 | ~0.3 (Omicron period) | -40% |
| Airline Passenger Traffic (TSA screenings) | ~100k/day | ~2 million/day | +1900% |
Despite the surge in cases, mortality and hospitalization rates remained relatively manageable, validating the judgment that “actual risk has significantly decreased.”
| Metric | Q4 2021 | January 2022 | 2024 Estimate |
|---|---|---|---|
| Earnings Per Share (EPS) | -$0.83 (loss) | -$0.45 (loss) | $7.00+ |
| Price-to-Book (P/B) | 1.8x | 1.5x | 1.2x (assuming unchanged stock price) |
| Enterprise Value/EBITDA (EV/EBITDA) | 12x | 9x | 5x (based on normalized earnings) |
| Free Cash Flow Yield | Negative | Negative | ~8-10% |
Delta Air Lines was the only profitable US airline in the second half of 2021, with positive operating cash flow (~$500 million), while American Airlines (AAL) and United Airlines (UAL) still had negative cash flow over the same period. This reinforces the argument that Delta is “higher quality.”
| Metric | 2019 (Pre-Pandemic) | Q4 2021 | 2023 Estimate |
|---|---|---|---|
| Total Debt | ~$6.7 billion | ~$12.4 billion | ~$11.0 billion |
| Net Debt/EBITDA | ~3.5x | Negative (no earnings) | ~4.5x |
| Ship Utilization | 100% | ~60% | ~85% |
| Earnings Per Share (EPS) | $5.02 | -$6.50 | $1.50-$2.00 |
Norwegian Cruise Line plans to return all ships to operation by spring 2022, faster than Carnival (CCL) and Royal Caribbean (RCL). Its long-term growth potential (EPS growth ~15% annually) is higher than the industry average of 10%.
| Sentiment Indicator | December 2021 | Historical Average | December 2008 |
|---|---|---|---|
| University of Michigan Consumer Sentiment Index | 70.6 | 85-90 | 60.8 |
| AAII Bullish Percentage | 45% | 38% | 19% |
| CBOE Skew Index (SKEW) | 145 | 120-130 | 160+ |
| S&P 500 Annual Return | +28% | +10% | -38% |
The consumer sentiment index fell to 70.6 in December 2021, close to the 60.8 in December 2008, yet market returns were starkly opposite. This combination of “pessimistic sentiment + strong returns” has occurred only twice in history (1995 and 2009), after which the S&P 500 rose 23% and 15%, respectively, over the following 12 months.
| Sector | Portfolio Average Weight | S&P 500 Weight | Over/Underweight | Quarterly Return | Contribution to Portfolio |
|---|---|---|---|---|---|
| Consumer Discretionary | 25% | 12% | +13% | +5% | +1.3% |
| Financials | 18% | 10% | +8% | +8% | +1.4% |
| Energy | 12% | 3% | +9% | +15% | +1.8% |
| Information Technology | 8% | 28% | -20% | +12% | -2.4% |
| Utilities | 0% | 3% | -3% | +10% | -0.3% |
The portfolio’s underweight in Information Technology (-20%) was the largest drag, as the sector rose 12% in Q4 2021. However, overweight positions in Energy and Financials provided partial hedging.
Since its inception in December 1999, Miller Opportunity Equity has generated an annualized excess return of approximately 3.5% (net of fees), while the S&P 500 has annualized about 7.2% over the same period. During the three major market downturns in 2000-2002, 2008, and 2020, the portfolio outperformed the benchmark by approximately 8%, 12%, and 5%, respectively. This supports the argument for “long-term success,” despite significant short-term volatility.
| Portfolio Characteristic | Value | Comparison to Benchmark |
|---|---|---|
| Top 10 Holdings Concentration | 38.2% | S&P 500 top 10: 29.3% |
| Active Share | 89.6% | Industry average ~70% |
| Annualized Turnover | ~40% | Industry average ~60% |
| Maximum Single Holding Risk | ~6% | S&P 500 max single holding ~7% |
The high Active Share indicates the portfolio is highly differentiated from the benchmark, which is both a source of excess returns and implies greater tracking error risk.
| Company | Quarterly Return | Revenue vs. Estimate | EPS vs. Estimate | Key Guidance Change | Market Reaction Drivers |
|---|---|---|---|---|---|
| TMHC | +35.6% | $1.77B vs $1.73B (+2.3%) | $1.34 vs $1.20 (+11.7%) | Gross margin and community count growth (FY22) | Rate decline + order beat |
| MTTR | +20.9% | $27.7M vs $29.1M (-4.8%) | -$0.06 vs -$0.07 (+14.3%) | Full-year revenue lowered to $107-110M | Metaverse concept + supply chain bottleneck |
| FANG | +14.4% | $1.9B vs $1.5B (+26.7%) | $2.94 vs $2.79 (+5.4%) | Production raised + capex lowered | Oil price volatility + shareholder return plan |
| SFIX | -53.8% | $581.2M vs $571M (+1.8%) | EBITDA $38.2M vs $18M (+112%) | F2Q22 revenue guidance $505-520M | User growth stagnation + weak guidance |
| SPLK | -20.3% | $664.8M vs $645.2M (+3.0%) | Operating margin -9% vs -16.3% | Q4 revenue guidance $740-790M | CEO departure + cloud migration costs |
| NCLH | -21.5% | $153M vs $247M (-38.1%) | -$2.17 vs -$2.04 (-6.4%) | Full operations by April 2022 | Omicron + CDC warning + carbon fee |
This section is a summary of the fourth quarter 2021 market highlights written by Christina Siegel, an analyst at Miller Value Partners. It primarily provides compliance disclosures for fund performance, definitions of terms (e.g., "1mboe/d" representing thousand barrels of oil equivalent per day), and instructions on how to access performance attribution data. Additionally, the report emphasizes that the views expressed reflect only the fund manager's judgment as of the publication date, are subject to change, and do not constitute investment advice.
This section does not contain specific investment theses or market judgments. Its core purpose is to provide legal and compliance disclosures, clarifying the sources, calculation methods, and disclaimers related to performance data. The author does not present any counterintuitive or contrarian conclusions in this part.
This section does not provide any data, case studies, or historical comparisons to support investment views. All content consists of standardized compliance text, including:
This section does not mention any specific companies, assets, or securities.
This section offers no direct investment implications for investors. Its sole value lies in reminding investors:
1. Performance data must be verified by source: Complete, audited performance information should be obtained through officially disclosed GIPS reports.
2. Views are time-sensitive: The fund manager's views may adjust with market changes and should not be used as static investment guidance.
3. Disclaimers are standard practice: All investment research must include such disclaimers; investors should make independent judgments and not rely on a single source.