Miller Value Partners recently released its 2019 Q3 investor letter – you can download a copy here. We just published another article about Bill Miller’s comments earlier today.
The investment management firm did not have a good third quarter, experiencing a 1.81% decline, while the S&P 500 rose 1.70%.
One of the top contributors for the fund over the quarter was RH (NYSE:RH). The investor had the following to say on the stock in its quarterly investor letter:
“RH (RH) increased 47.8% over the quarter after reporting 2Q results above pre-announced results and raising full-year guidance again. The company reported 2Q earnings per share of $3.20 above preannounced EPS of $2.65-2.72 and consensus of $2.68. Total sales increased 9.9% to $706.5M above guidance of $696-699M and consensus of $694.9M. The company raised their full-year EPS guidance again to $10.53-10.76 from preannouncement guidance $9.08-9.52 with total sales growth of 6.8%-7.3% up from 6-7% previously. The company announced the pricing of $300M 0% convertible notes due 2024 at a 25% conversion premium to a closing price of $169.12. The company entered into a hedge to limit earnings dilution as a result of the convertible note issuance up to a 100% premium of the stock’s price of $169.12.”
RH was in 32 hedge funds’ portfolios at the end of the third quarter of 2019. There were 28 hedge funds in our database with RH positions at the end of the previous quarter. Even though our calculations also showed that RH isn’t among the 30 most popular stocks among hedge funds, overall hedge fund sentiment towards RH is still very bullish compared to its peers. Billionaires Warren Buffett and Jim Simons have the two biggest positions in RH among the 750 hedge funds tracked by Insider Monkey.
Meanwhile, one of the main negative contributors for the stock in the quarter was Mallinckrodt PLC (NYSE: MNK). The write-up of the stock went as the following:
“Mallinckrodt plc (MNK) continued to decline over the quarter, losing 73.8%, as opioid litigation continued to weigh on the stock. The stock drastically dropped after Bloomberg reported that the company had hired restructuring advisers, although nothing has come of it so far. The company then announced a settlement to resolve the track 1 opioid cases in two Ohio counties with a $24M cash payment and $6M in generic product donations. The company lost an appeals court bid to revive patent-infringement claims over Praxair’s generic version of INOmax. The company announced positive Phase 3 Data for both Terlipressin and Stratagraph over the quarter as well as positive read -outs from their Phase 4 Acthar studies in MS and RA.”
The hedge fund also added two new names to its portfolio in the quarter, Medifast Inc (NYSE: MED) and Peloton Interactive Inc(NASDAQ: PTON):
The letter had the following to say on MED:
“Medifast is a little known Baltimore-based health and wellness company. They’ve done a remarkable job growing the business from a few hundred million in revenues a few years ago to $750M this year after orienting the business around health coaches. They aimed to double the business in three years and accomplished it in two. Now they’re working on a plan to double revenues again. They’ve done all of this profitably while returning capital to shareholders. The stock peaked about a year ago at $260 per share and has fallen to around $99 weighed down by competitive concerns after troubles at WW (formerly Weight Watchers) and Nutrisystem, along with some headline-grabbing short reports and concerns about an ERP (enterprise resource planning software) implementation. At the current level, the company trades for just 14.5x earnings with 20%+ topline growth going forward and a 3% dividend yield. If it reaches its 2021 target, it’s trading for only 10x earnings out a couple of years. We believe Medifast has the potential to double.”
Medifast, Inc. was in 19 hedge funds’ portfolios at the end of June. MED investors should be aware of a decrease in hedge fund sentiment of late. There were 28 hedge funds in our database with MED holdings at the end of the previous quarter.
Meanwhile, the fund had the following to say on its second addition PTON:
“The controversial Peloton story garnered many headlines. While the IPO priced at $29, the top of the range, it quickly fell 20% after bears came in. This one provokes strong feelings all around: bulls love it and bears despise it. As you can see, we fall more in the bull camp, although we admit that if the market really sours on unprofitable growth names, it could trade lower from here. What we love about it: Peloton users are more cult-like club than agnostic exercisers. The company focuses on wowing them and high net promoter scores along with sky-high growth suggest they succeed. Competitive concerns abound, but the bet is that the consumer brand power of Peloton is more similar to Apple (NASDAQ:AAPL) than Fitbit (NYSE:FIT) or GoPro (NASDAQ:GPRO). While the equipment is expensive, the zero-cost financing plan means the cost of ownership is comparable to a gym membership while usage is often better. While they continue to invest in growth, the company has already demonstrated the profitability of the model by achieving adjusted EBITDA breakeven. Now it’s ramping investment in other areas (treadmill and international growth). We believe the strong brand along with the launch of a lower-priced treadmill will fuel growth. We believe the stock has the potential to be up more than 50% from these levels.”
There were a total of 27 hedge funds with bullish PTON positions at the end of September. You can see the list of hedge fund managers who agree with Bill Miller here.
Disclosure: None. This article originally published at Insider Monkey.
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