Miller Value Partners, an investment management firm, published its “Miller Deep Value Strategy” third quarter 2021 investor letter – a copy of which can be seen here. For the third quarter of 2021, the fund was down in excess of 10%, lagging the overall market and the S&P 1500 Value Index. The Deep Value Strategy remains well ahead of the market for the year, up in excess of 70%. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Miller Value Partners, in its Q3 2021 investor letter, mentioned Bed Bath & Beyond Inc. (NASDAQ: BBBY) and discussed its stance on the firm. Bed Bath & Beyond Inc. is a Union, New Jersey-based retail-store company with a $2 billion market capitalization. BBBY delivered a 13.57% return since the beginning of the year, while its 12-month returns are down by -5.92%. The stock closed at $20.17 per share on November 4, 2021.
Here is what Miller Value Partners has to say about Bed Bath & Beyond Inc. in its Q3 2021 investor letter:
“Our largest laggard during the quarter was Bed Bath & Beyond (BBBY). As we have highlighted previously, not all transformations are linear and there is always the potential for a short-term pullback in executing the plan. We expect the operational pause will lead to marketplace skepticism and question the success of the long-term plan. The company has had some near-term challenges from weaker store traffic related to Covid-19 delta variant’s impact along with rising supply chain and transportation costs. However, we disagree with the marketplace view that these headwinds will continue to overwhelm the significant ongoing improvements that management is making to the core operations. We very much like the new CEO and his additions to his management team – strong executives with significant transformation experience. As the new initiatives further rollout over the coming quarters, we expect to see further improvement in future operating trends. Management is in the process of rolling out 8-10 owned brands, which should drive margin expansion and dramatically enhance the overall business model. Store brands are 1,000 basis points higher gross margin than national brands, and as they move from 10% to 30% of sales, they should become a significant positive profit contributor and help management achieve their long-term gross margin target of 38%. Bed Bath also continues to have a very strong balance sheet ($10/share in cash), and has been using non-core asset sales to complete a very accretive share buyback program (likely greater than 20% of the float by year-end). With the recent pullback, we see some similarities to GameStop early in their turnaround as the company aggressively reduced their shares outstanding (>30%) ahead of revenue stability and profit improvement. We believe success on Bed Bath’s transformation plan should see profits double over the next couple of years and should lead to significantly higher normalized earnings and free cash flow per share. At an enterprise value to revenue under .2x, we believe Bed Bath remains at a significant discount to its intrinsic value.”
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Based on our calculations, Bed Bath & Beyond Inc. (NASDAQ: BBBY) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. BBBY was in 21 hedge fund portfolios at the end of the first half of 2021, compared to 23 funds in the previous quarter. Bed Bath & Beyond Inc. (NASDAQ: BBBY) delivered a -25.95% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
