The Intellectual Investor: Income Strategy Weekly Updates

November 19, 2018

Income Strategy Update for Week Ended 11/16/18

Hi-Crush Advances on New Northern White Contract While Maiden Falls on Disappointing Results

Last week, the Income Strategy declined -2.74%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s -1.29% fall and the S&P 500’s -1.54% loss. (Exhibit 1). The strategy ended the week up 2.09% YTD, or 229 basis points ahead of the high yield index and 202 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 11/16/181

Time Period Income Strategy ML HY II S&P 500
Last Week (11/9 – 11/16) -2.74% -1.29% -1.54%
MTD -1.57% -1.03% 1.07%
QTD -8.21% -2.65% -5.84%
YTD 2.09% -0.20% 4.11%
Inception (annualized since 4/2/2009-10/31/18) 14.49% 11.28% 16.01%

Source: Bloomberg, Miller Value Partners

Equities comprised all of last week’s top five contributors (Exhibit 2). Hi-Crush Partners (HCLP) advanced after announcing they signed a long-term frac sand supply agreement with Chesapeake Energy (CHK) for the purchase of in-basin Northern White sand. Further, Hi-Crush was up in sympathy with peer Covia Holdings (CVIA), whose management stated that pricing pressures have largely dissipated during Q4 and that they expect Northern White to rebound from unsustainably low levels. Canaccord upgraded Just Energy (JE CN) from “Hold” to “Speculative Buy” and a C$5.50 price target, 15% total return potential with upside to C$6.50 if the company’s increased pricing strategy holds. The analyst also attributed the upgrade to significant gross margin improvement and a stronger payout ratio (82% on a trailing twelve month basis vs 98% in prior quarter). Greenhill (GHL) rose as CEO Scott Bok purchased 134,224 shares for $2.99M, which comes on the heels of another 86,410 shares Bok purchased in the prior week. Further, Chairman Robert Greenhill added 219,770 shares totaling $4.99M. CenturyLink (CTL) maintained their $0.54/share dividend (11.3% annualized yield). There was no price-changing news on Seaspan (SSW).

Exhibit 2: Significant Contributors to Performance, 11/9/18 – 11/16/18

Name Type Return
Hi-Crush Partners LP Equity 15.5%
Just Energy Group Inc Equity 3.6%
Greenhill & Co Inc Equity 7.7%
CenturyLink Inc Equity 1.4%
Seaspan Corp Equity 1.5%

Source: Miller Value Partners

Four equities and a preferred comprised last week’s top five detractors (Exhibit 3). Maiden Holdings (MHLD) reported Q3 EPS of $(2.83) versus estimates of $0.18 due to a new $210M reserve charge in the AmTrust Financial (AFSI) book. Further, the company announced a loss portfolio transfer of Maiden’s AmTrust quota share to Enstar Group (ESGR), who will assume loss reserves of approximately $2.675B. Apollo Global Management (APO) and Carlyle Group (CG) fell on a note from Morgan Stanley, who now favors Discount Brokers over Alternative Asset Managers based on more consistent earnings and greater visibility. The analyst remains optimistic on the Alt’s long-term secular growth story, but sees increased risk to portfolio company marks, as well as their ability to monetize portfolio investments and generate cash performance fees. Apollo and Carlyle were both downgraded from “Overweight” to “Equal-Weight” with price targets of $34 (25% implied upside) and $23 (28% implied upside), respectively. National CineMedia (NCMI) fell despite top holder Standard General purchasing 76,300 shares for ~$530K.

Exhibit 3: Significant Detractors from Performance, 11/9/2018 – 11/16/18

Name Type Return
Maiden Holdings Ltd Equity -31.0%
Carlyle Group Equity -9.9%
Apollo Global Management Equity -8.0%
National CineMedia Equity -7.5%
AmTrust Financial Services 6.95% Preferred -6.7%

Source: Miller Value Partners

Did you know that we write this piece for Opportunity Equity as well? Check it out.

1The performance figures reflect the results of a representative account net of management fee and certain other expenses. For important additional information about Income Strategy performance, please click on the Income Strategy 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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