The Intellectual Investor: Opportunity Equity Weekly Updates

January 17, 2017

LMM Opportunity Equity Strategy Update for Week Ended 1/13/17

Airlines move up on positive data, While Endo moves down due to generic price erosion

Last week, the Opportunity Equity Strategy lost 0.02%, outperforming the S&P 500’s 0.09% decline (Exhibit 1). The strategy ended the week up 1.96% YTD, or 29 basis points ahead the S&P 500.

Exhibit 1: Preliminary Performance of LMM Opportunity Equity Strategy Versus Equity Indices, Through 1/13/171

Time Period Opportunity Equity S&P 500
Last Week (1/6 – 1/13) -0.02% -0.09%
MTD 1.96% 1.67%
QTD 1.96% 1.67%
YTD 1.96% 1.67%
Inception (annualized since 12/30/99) 6.15% 4.67%

Source: Bloomberg, LMM

Airlines comprised three of the top five contributors for the week with United Continental Holdings (UAL), Delta Air Lines Inc. (DAL) and American Airlines Group Inc. (AAL) rising for the week. United Continental released its December sales and revenue figures announcing that December consolidated traffic increased 2.6% YoY and increasing estimates for 4Q PRASM to -1.25% to -1.75% YoY compared to previous guidance of down 3%-4%. Delta Air Lines reported fourth quarter earnings with results largely matching expectations. The company provided positive guidance for 2017 with 1Q PRASM at flat to +2%. American Airlines also announced December sales and revenue figures increasing their 4Q RASM guidance to 0%-2% from its previous guidance of -1% to 1%. There was minimal news on the other top contributors.

Exhibit 2: Significant Contributors to Performance, 1/6/17 – 1/13/17

Name Type Return
Platform Specialty Products Equity 8.9%
United Continental Holdings Equity 4.1%
Delta Air Lines Equity 3.1%
American Airlines Group Equity 3.1%
Pulte Group Equity 4.0%

Source: LMM LLC.

Endo Pharmaceuticals Holdings Inc. (ENDP) declined last week after presenting at the JPM healthcare conference. During the presentation the company reaffirmed FY2016 guidance with revenues of $3.87-$4.03B and adjusted EPS of $4.50-4.80 but stated that base generics pricing erosion will be similar in 2017 to 2016 (~30%). Intrexon Corp. (XON) also presented at the JPM healthcare conference focusing on their healthcare verticals, announcing that they expect up to 10 clinical trials or INDs to be filed by mid-2017. Earlier in the week, Intrexon and Ziopharm announced a Cooperative Research and Development Agreement with the National Cancer Institute. MGIC Investment Corp (MTG) announced December credit data showing December Insurance in Force (IIF) at $128B, up 4.3% and primary delinquent inventory down 19.7%. The stock moved down after Secretary of Housing and Urban Development (HUD) Julian Castro announced that FHA would reduce its annual mortgage insurance premium by 25bps for most new mortgages. Gamestop Corp (GME) moved below the 50-day moving average after reporting weak holiday results with sales -16.4% versus guidance of -5% to -10% but maintained EPS guidance. Nationstar Mortgage (NSM) announced the approval of a $100M share repurchase plan that is replacing the existing $250M plan which expired in December. The company also appointed Mihir Patel, previously at Capital One (COF), as the company’s new Chief Risk Officer. The stock ended the week down after it was cut to sell at Compass Point with a price target of $16, 10% below where it was trading on Friday.

Exhibit 3: Significant Detractors from Performance, 1/6/17 – 1/13/17

Name Type Return
Endo Pharmaceuticals Holdings Equity -20.3%
Intrexon Corp Equity -6.2%
MGIC Investment Corp Equity  -3.6%
GameStop Corp. Equity  -7.3%
Nationstar Mortgage Holdings Equity  -6.4%

Source: LMM LLC.

1The performance figures reflect the deduction of a model investment management fee of 1% (the highest fee for separate accounts under our fee schedule) 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 LMM.

Any views expressed are subject to change at any time, and LMM 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.

©2017 LMM LLC. LMM LLC is owned by Bill Miller and Legg Mason, Inc.

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