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 explains how a fund manager traded stocks in the second quarter of 2022. They think travel stocks like Expedia and United Airlines are undervalued—prices fell sharply, but business is strong. For example, Expedia's website traffic grew a lot, and it plans to save $1 billion in costs, giving a free cash flow yield (cash earnings relative to stock price) of 20%. They also used put options (a type of insurance contract) to profit from rising interest rates. For regular investors, this shows that market fear can create buying opportunities in solid companies, but risks like a recession remain. Worth a read for concrete data on why the manager bought when others sold.
Miller Opportunity Equity posted a net fee total return of -29.3% in the second quarter of 2022, underperforming the benchmark S&P 500 Index's -16.1%. Attribution analysis indicates that stock selection and allocation contributed to the underperformance, partially offset by interaction effects. The
This chapter analyzes Miller Opportunity Equity's performance, portfolio adjustments, and core investment logic in the second quarter of 2022. The report focuses on new positions in the travel sector (Expedia, United Airlines) and the use of options to hedge interest rate risk, while also discussing the performance of major contributors and detractors.
The author argues that market pessimism toward the travel sector is excessive, with Expedia and United Airlines currently valued well below their fundamental improvement potential, representing a "once-in-a-decade" opportunity. Meanwhile, the fund seeks asymmetric returns amid macro uncertainty through options hedging interest rate risk (TLT Puts) and holdings of undervalued assets like Alibaba.
Comparative Data Table:
| Company/Asset | Key Metric | Current Performance/Valuation | Historical/Expected Comparison |
|---|---|---|---|
| Expedia | Stock YTD | -46.6% | S&P 500 -17.6% |
| Expedia | FCF Yield (2023E) | 20% | No direct comparison |
| United Airlines | 2026E EPS | $20 | Corresponds to 1.8x P/E |
| Norwegian Cruise Line | 2023E EBITDA | Record | Current P/E ~6x (historical avg 12x) |
| Bausch Health | B+L Spin-off Value/Share | $12.55 | 39% above current stock price |
| Karuna Therapeutics | Schizophrenia Market Potential | Stock could double | Based on Phase III success assumption |
Cleveland-Cliffs' vertical integration model (from iron ore mining to finished steel) offers a significant cost advantage during scrap price upcycles. According to industry data, when scrap prices rise by $50 per ton, competitors using electric arc furnaces (EAF) (e.g., Nucor) see their per-ton steel costs increase by approximately $40, while Cliffs, with its own iron ore resources, sees only a $10-15 increase. With scrap prices fluctuating between $350-550 per ton in 2023, if EAF capacity expansion (expected 5 million tons new) drives scrap demand higher in 2024, Cliffs' profit elasticity will outperform peers.
Comparative Data: Sensitivity of Different Processes to Scrap Price Changes
| Process Type | Impact on Per-Ton Steel Cost per $50/ton Change in Scrap Price | Representative Company |
|---|---|---|
| Blast Furnace-Basic Oxygen Furnace (BF-BOF) | $10-15 | Cleveland-Cliffs |
| Electric Arc Furnace (EAF) | $35-45 | Nucor, Steel Dynamics |
The market fears that falling steel prices will erode profits, but 40% of Cliffs' contracts are long-term fixed-price (typically 3-5 years), insulating this portion of revenue from spot price volatility. In Q1 2024, the company's ASP was $1,200/ton, while spot hot-rolled coil prices had fallen to $950/ton. If long-term contract average prices remain above $1,100/ton, even if spot prices fall another 10%, the company's full-year EBITDA could still exceed $3.5 billion (compared to $4.2 billion in 2023). The market generally forecasts 2024 EBITDA at $2.8-3.0 billion, implying a 15-20% upward revision potential.
The company has authorized the repurchase of 12.4% of outstanding shares. At the current stock price (approximately $18), this amounts to about $600 million. In 2023, the company repurchased 4.5% of outstanding shares at an average cost of $22/share. If the stock price remains depressed, buybacks will accelerate, forming a price floor. Historical data shows that after CLF announced a buyback in 2020, the stock rose 60% within 12 months, indicating a significant catalytic effect on valuation recovery.
The steel industry is currently in a cyclical downturn (Q2 2024), but Cliffs' PB is 0.8x, below its historical average of 1.2x and below North American peers (Nucor 1.5x, Steel Dynamics 1.3x). Assuming a long-term steel price of $750/ton (implied by the company's target price), a DCF valuation yields approximately $40/share, implying 55% upside from the current price. Market pricing of recession risk may be excessive, as steel demand from the U.S. Infrastructure Investment and Jobs Act (IIJA) and CHIPS Act will materialize in 2025-2026, supporting long-term prices.
In performance attribution, the interaction effect measures the synergy between sector allocation and stock selection. For the CLF position, if the fund manager simultaneously overweighted the steel sector (allocation effect) and selected CLF (selection effect) in Q1, the interaction effect could be positive, indicating consistent judgment. However, if sector allocation contributed negatively due to falling steel prices, while CLF held up relatively well due to long-term contracts, the interaction effect could be negative (i.e., allocation error partially offset by stock selection). Investors should monitor the sign of the interaction effect in attribution reports to assess whether the manager's sector and stock decisions form a cohesive strategy.
The core logic for Cleveland-Cliffs lies in the market underestimating the stabilizing effect of its long-term contracts on profits and the relative advantage of its vertical integration model during scrap cost upcycles. The buyback program provides short-term support, while long-term demand catalysts (infrastructure bills) remain unpriced. At current valuations near historical lows, if steel prices stabilize, the stock has significant upside potential.
This chapter is the Q2 2022 performance review of the Opportunity Equity strategy under Miller Value Partners, co-authored by portfolio managers Samantha McLemore and Christina Siegel. The report focuses on the strategy's absolute and relative performance during the quarter, attribution analysis, portfolio changes, and assessment of the market environment.
The author's core investment thesis is that, despite the strategy significantly underperforming its benchmark in Q2 2022 (-29.3% vs. -16.1%), the portfolio's active management characteristics (active share of approximately 91.3%) and contrarian positioning (e.g., overweight in consumer discretionary, financials, and energy) are expected to generate excess returns when market style shifts or individual stock values revert. Counterintuitive judgments include: against a backdrop of strong travel demand and record projected EBITDA, shares of Expedia and United Airlines fell sharply. The author believes the market is overly pessimistic, presenting buying opportunities with high free cash flow yields (Expedia at 20%).
| Metric | Miller Opportunity Equity | S&P 500 |
|---|---|---|
| Q2 2022 Net Fee Total Return | -29.3% | -16.1% |
| Top 10 Holdings Weight | 45.8% | 27.0% |
| Active Share | ~91.3% | - |
| New Position (Example) | Expedia Group Inc. | - |
| New Position (Example) | United Airlines Holdings | - |