Miller Value Partners, an investment management firm, published its “Miller Opportunity Equity” third quarter 2021 investor letter – a copy of which can be seen here. A quarterly net decline of 14.2% has been recorded by the fund for the third quarter of 2021, compared to the S&P 500 that rose 0.6% in the same period. 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 Farfetch Limited (NYSE: FTCH) and discussed its stance on the firm. Farfetch Limited is a London, United Kingdom-based online luxury fashion retail company with a $14.3 billion market capitalization. FTCH delivered a -39.49% return since the beginning of the year, while its 12-month returns are down by -9.11%. The stock closed at $38.61 per share on November 4, 2021.
Here is what Miller Value Partners has to say about Caesars Entertainment, Inc. in its Q3 2021 investor letter:
“We do still see some higher growth companies with reasonable expectations. Farfetch is a good example. Most high growth darlings trade at much higher valuations than they have historically. This isn’t true of Farfetch, which trades inline with Amazon’s historical valuation, which is a good comparable due to business model similarities. Both companies have commerce marketplaces (though Farfetch’s is high margin and Amazon’s is high asset turns) and technology services businesses. Amazon’s web services (AWS) is now well recognized. Similarly, Farfetch’s strategy is to build the operating system for luxury goods companies who have been notoriously bad at technology. The market doesn’t yet reflect any value for this business, in our opinion.
Farfetch sold-off dramatically, recently trading at less than half its peak earlier this year. Fundamentals have performed strongly. The company has been able to maintain high growth on the top of difficult comps from last year, and recently reached adjusted EBITDA breakeven.
We think the company will continue to drive both growth and incremental profits over the coming years. The company’s nascent platform services and advertising businesses represent sizeable opportunities. Cost rationalization in shipping and logistics should create efficiencies. People who focus on Farfetch’s historical losses don’t properly distinguish between investments and operating losses (a common problem in a world of intangible assets). We believe Farfetch has the potential to be a multi-bagger over a multi-year period.
Long duration assets like Farfetch are more sensitive to movements in interest rates. We evaluate all our investments for adequate upside even with higher interest rates. Yet rising rates does represent a legitimate risk. Warren Buffett equated interest rates to gravity for financial assets.
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Based on our calculations, Farfetch Limited (NYSE: FTCH) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. FTCH was in 63 hedge fund portfolios at the end of the first half of 2021, compared to 57 funds in the previous quarter. Farfetch Limited (NYSE: FTCH) delivered a -17.25% 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.
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, billionaire John Paulson is loading up on the miners, so we are checking out stock pitches like this mining stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.
Disclosure: None. This article is originally published at Insider Monkey.
