January 22, 2019

Opportunity Equity Update for Week Ended 1/18/19

Banks Head Higher on Earnings While Pulte Falls on Downgrades

Last week, the Opportunity Equity strategy gained 3.57%, outperforming the S&P 500’s 2.90% rise (Exhibit 1). The strategy ended the week up 16.25% YTD, or 962 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Opportunity Equity Strategy Versus S&P 500, Through 1/18/191

Time Period Opportunity Equity S&P 500
Last Week (1/11 – 1/18) 3.57% 2.90%
MTD 16.25% 6.63%
QTD 16.25% 6.63%
YTD 16.25% 6.63%
Inception (annualized since 6/26/00) 7.04% 5.37%

Source: Bloomberg, Miller Value Partners

Banks traded up this week after a number of positive earnings reports. Bank of America Corp. (BAC) crossed above the 50, 100, and 200-day moving average. The company announced 4Q earnings which beat expectations with EPS of $0.70 ahead of consensus of $0.63 driven by strong net interest margin (2.48% up 6bps QoQ), better revenues ($22.9B vs. $22.4B expected) and lower loan loss provision ($905m vs. $945m expected). The company showed a 16th consecutive quarter of operating leverage on a core efficiency ratio of 57.5% and a return on total capital employed (ROTCE) of 16.3% up 100bps YoY. Citigroup Inc. (C) crossed above the 50-day moving average after announcing 4Q results with EPS of $1.65 beating consensus of $1.55. Core revenue came in below consensus ($17.1B vs. $17.5B) with net interest income meeting expectations but offset by weaker core fee income of $5.2B versus $5.5B expected and a decline in trading revenues YoY. The company posted ROTCE of 10.9% and maintains its target to expand ROTCE to 12% in 2019 and 13.5% in 2020. Citi expects a $2B increase in net interest income in 2019. United Continental Holdings (UAL) gained over the week after reporting 4Q results that beat expectations. The company reported EPS of $2.41 ahead of consensus of $2.04 driven by strong passenger unit revenue up 4.8% with total revenue of $10.5B ahead of consensus of $10.3B along with non-fuel unit costs decreasing 0.7%. The company provided preliminary 1Q19 guidance with capacity growth of 5-6%, passenger unit revenue of +0-3%, costs per unit ex-fuel of flat to better leading to a further 150bps of pretax margin expansion. The company guided for full year capacity growth of 4-6% and EPS of $10-12. Brighthouse Financial Inc. (BHF) crossed above the 50-day moving average. Avon Products Inc. (AVP) crossed above the 50, 100, 200 day moving average. Over the week the company announced the launch of a new partnership with Rappi, an on-demand delivery service that will provide two-hour delivery in Latin America.

Exhibit 2: Significant Contributors to Performance, 1/11/19 – 1/18/19

Name Type Return
Bank of America Corp. Equity 12.6%
United Continental Holdings Equity 6.9%
Brighthouse Financial Inc. Equity 8.5%
Citigroup Inc. Equity 11.3%
Avon Products Inc. Equity 12.3%

Source: Miller Value Partners

Pulte Group Inc. (PHM) crossed below the 200-day moving average after the stock was downgraded to underperform at RBC with a price target of $25, downside of 6% and downgraded to sell at BTIG with a price target of $23, downside of 14%. Lennar Corp. (LEN) was down for the week. The company announced a new repurchase authorization up to $1B or 25m shares. Buckingham initiated on Lennar with a buy rating and a price target of $56, upside of 27%. CenturyLink (CTL) declined over the week as the name was downgraded at Macquarie to underperform with a price target of $16, 1% upside, with the analyst citing dividend coverage as a main concern given their lack of long-term growth and higher leverage at 4x. Qualcomm Inc. (QCOM) crossed below the 50-day moving average after losing a patent ruling against Apple in Mannheim court. The company said they would appeal after winning a separate case before a court in Munich in December. There was minimal news on Ziopharm Oncology Inc. (ZIOP).

Exhibit 3: Significant Detractors from Performance, 1/11/19 – 1/18/19

Name Type Return
Pulte Group Inc. Equity -7.0%
Lennar Corp. Equity -5.0%
CenturyLink Inc. Equity -2.7%
Qualcomm Inc. Equity -3.9%
Ziopharm Oncology Inc. Equity -7.4%

Source: Miller Value Partners

1The performance figures reflect the results of a representative account net of management fee and certain other expenses. For important additional information about Opportunity Equity performance, please click on the Opportunity Equity Composite Performance Disclosure. The performance returns shown in this report are preliminary and are subject to revision. Past performance is no guarantee of future results.

Significant Contributors and Significant Detractors are the Strategy holdings that had the greatest effect on Strategy performance for the week. Holdings that have been in the Strategy since the end of the most recent calendar quarter are identified by name. 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 Miller Value Partners disclaims any responsibility to update such views. 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. Content may not be reprinted, republished or used in any manner without written consent from Miller Value Partners.

©2018 Miller Value Partners, LLC

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