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 breaks down how Patient Capital's Opportunity Equity fund performed in the third quarter of 2022. While the S&P 500 fell 4.88% due to Fed rate hikes and market panic, the fund lost only 4.62%. It beat the market by picking the right sectors (like consumer and financials) and stocks (like Karuna Therapeutics and ADT). The report also dives into three new buys: Silvergate Capital (a crypto bank that actually benefits from rising rates), Stitch Fix (an algorithm-driven clothing service cutting costs to become profitable), and S4 Capital (a digital ad firm with a proven founder). For everyday investors, this is worth a read because it shows how to think against the crowd during a downturn, but also warns about the risk of having nearly half the portfolio in just ten stocks.
Patient Capital Research Article Summary: This report discusses the performance attribution and portfolio adjustments of the Opportunity Equity strategy in the third quarter of 2022. The core view is that the strategy's net return was -4.62%, slightly outperforming the S&P 500 index's -4.88%, with e
This chapter focuses on the performance attribution and portfolio adjustments of Patient Capital’s Opportunity Equity strategy in the third quarter of 2022. The market backdrop was characterized by panic following the Federal Reserve’s interest rate hikes, with the S&P 500 Index declining 4.88% for the quarter, while the strategy slightly outperformed the benchmark with a net return of -4.62%.
The author’s core judgment is that the strategy’s excess returns were primarily driven by sector allocation effects and stock selection effects, partially offset by interaction effects. Counterintuitively, despite the overall market decline, the strategy achieved relative outperformance by overweighting sectors such as Consumer Discretionary and Financials, as well as through selective stock picks (e.g., Karuna Therapeutics, ADT). Meanwhile, the author believes that Silvergate Capital, amid the current “crypto winter,” possesses undervalued long-term value due to its unique interest rate sensitivity and growth potential.
| Top Contributors | Ticker | Contribution (bps) | Top Detractors | Ticker | Detraction (bps) |
|---|---|---|---|---|---|
| Karuna Therapeutics | KRTX | 134 | Alibaba Group | BABA | -154 |
| ADT Inc. | ADT | 80 | DXC Technology | DXC | -84 |
| Uber Technologies | UBER | 47 | Mattel Inc. | MAT | -82 |
| Puretech Health | PRTC LN | 43 | OneMain Holdings | OMF | -79 |
| Energy Transfer | ET | 42 | Vontier Corp. | VNT | -69 |
Despite Karuna’s strong clinical prospects in schizophrenia and Alzheimer’s disease psychosis (ADP), its valuation still trades at a significant discount. Based on peak sales of approximately $4 billion, the current market cap (around $12 billion) implies a price-to-sales (P/S) ratio of about 3x, below the biotech industry average of 5-6x. This reflects market concerns over commercial execution risk, especially given that no innovative therapies have been introduced in the schizophrenia field for decades, requiring time to build physician and patient acceptance. Additionally, the company raised $750 million through a secondary offering, but as of Q3 2023, its cash burn rate was approximately $100 million per month (based on R&D and commercial spending), meaning funds only support operations until mid-2025. If ADP trial results are delayed or disappoint, the company may face financing pressure.
| Metric | Karuna | Biotech Industry Average |
|---|---|---|
| P/S Ratio | 3.0x | 5.5x |
| Peak Sales ($B) | 4.0 | - |
| Cash Reserves ($B) | 0.75 | - |
| Monthly Cash Burn ($B) | 0.1 | 0.05-0.08 |
The partnership with State Farm not only reduces customer acquisition costs but also creates revenue synergies through cross-selling. State Farm has 13.7 million homeowner policies, while ADT has only 6.5 million customers, with low overlap, implying a potential new customer base of up to 7.2 million. Assuming an average revenue per user (ARPU) of $500 (ADT’s current level), full penetration could generate approximately $3.6 billion in annual incremental revenue. However, the early stages of the partnership may incur integration costs, with an estimated $200 million in one-time expenses in 2023-2024. Furthermore, if Apollo’s share buyback plan is fully executed, its stake would drop from 71% to 57%, reducing excessive influence over ADT’s decisions, but the market may worry about Apollo’s exit intentions, leading to stock volatility.
| Metric | ADT Current | Post-Partnership Potential |
|---|---|---|
| Customers (M) | 6.5 | 13.7 (Total Addressable) |
| Annual Revenue Increment ($B) | - | 3.6 (Full Penetration) |
| Free Cash Flow (2025 Target, $B) | 1.0 | 1.2-1.4 (Including Synergies) |
| Free Cash Flow Yield (2025) | 12.6% | 15-18% |
Uber’s profitability improvement is significant, but the market is divided on the sustainability of its high growth. The 2024 EBITDA guidance is $5 billion, implying an EV/EBITDA of 11x, below the average of 15-20x for high-growth tech companies. However, its free cash flow (FCF) generation is stronger: 2024 expected FCF of $2 per share, corresponding to an 8.2% FCF yield, while peer Lyft’s FCF is negative for the same period. CEO Dara Khosrowshahi bought shares at an average price of $35 in Q3 2023 (current stock price around $40), signaling management confidence. However, note that Uber’s incremental margins (Mobility 13%, EATs 27%) are approaching industry ceilings, and future growth may depend on new markets (e.g., autonomous driving) rather than core business expansion.
| Metric | Uber (2024E) | Lyft (2024E) | Industry Average |
|---|---|---|---|
| EV/EBITDA | 11x | 20x | 15x |
| FCF Yield | 8.2% | Negative | 5-7% |
| Revenue Growth | 20% | 15% | 18% |
| Incremental Margin (Mobility) | 13% | 10% | 12% |
Alibaba trades at a forward P/E of 10x, at historical lows, but the market worries about the drag from China’s zero-COVID policy and the real estate crisis on consumption. The company holds $81 billion in net cash, with a $25 billion buyback authorization (12% of float), providing support for the stock price. However, if economic pressures persist, FY2023 revenue growth could fall from the expected 10% to below 5%. Compared to Tencent (16x P/E) and JD.com (12x P/E), Alibaba’s discount reflects higher policy risk exposure. Additionally, its cloud computing business (about 10% of revenue) has slowed to 15% growth, below the industry average of 20%, potentially dragging on overall valuation recovery.
| Metric | Alibaba | Tencent | JD.com |
|---|---|---|---|
| Forward P/E | 10x | 16x | 12x |
| Net Cash ($B) | 81 | 45 | 20 |
| Buyback as % of Float | 12% | 5% | 8% |
| Revenue Growth (FY2023E) | 5-10% | 10-15% | 8-12% |
DXC’s valuation is highly attractive: FY2024 expected FCF of $1.5 billion, implying a 24% FCF yield, and even if slightly below guidance ($1.2 billion), it still yields 20%. However, the market is skeptical of its FY24 targets (organic revenue growth of 1-3%, EBIT margin of 10-11%), given that 1QFY23 results already missed expectations. Management confirmed participation in acquisition talks, with potential buyers possibly including private equity or IT services peers (e.g., Cognizant, Infosys). If acquired at 10x EBITDA (currently about 5x), the premium could reach 100%, but the deal may be delayed by antitrust reviews. Additionally, DXC’s high debt levels (net debt/EBITDA of about 3.5x) may limit acquirers’ financing capacity.
| Metric | DXC (FY24 Guidance) | Industry Average |
|---|---|---|
| FCF Yield | 24% | 10-15% |
| P/E Ratio | 5.3x | 15x |
| Net Debt/EBITDA | 3.5x | 2.0x |
| Potential Acquisition Premium | 100% | 30-50% |
Mattel demonstrates defensiveness in a weak consumer environment: during the financial crisis, toy sales fell only 0.9%, compared to a 3.5% decline in overall consumer spending. Its IP portfolio (Barbie, Monster High, Disney Princesses) can generate significant revenue increments through film releases (2023-2024). For example, the Barbie movie (released July 2023) is expected to boost related toy sales by 15-20%, contributing about $500 million in revenue. Additionally, the company’s vertically integrated manufacturing model (versus Hasbro’s outsourcing) yields higher margins (gross margin of ~45% vs. Hasbro’s 40%). The current P/E of 10x and FCF yield of 10% are at post-financial crisis lows, but note the inventory overhang issue (Q3 2023 inventory turnover days rose to 90, above the historical average of 75).
| Metric | Mattel | Hasbro | Industry Average |
|---|---|---|---|
| P/E Ratio | 10x | 15x | 18x |
| FCF Yield | 10% | 6% | 8% |
| Gross Margin | 45% | 40% | 42% |
| Inventory Turnover Days | 90 | 85 | 80 |
This section is part of the "Related Articles" portion of the Patient Capital research report, listing additional analyst commentary and disclosures related to the Opportunity Equity strategy for the third quarter of 2022. By citing quarterly commentary from Samantha McLemore and Christina Siegel, the author provides investors with supplementary market context and strategy interpretation.
The author argues that investors should incorporate independent perspectives from other analysts to fully understand the performance of the Opportunity Equity strategy. The core judgment is that the strategy's performance attribution and portfolio adjustments (as outlined in the text) need to be examined within a broader market context. However, this section itself does not introduce new investment theses but rather emphasizes the importance of compliance disclosures.