October 21, 2019

Income Strategy Update for Week Ended 10/18/19

Debt of Endo Soars on Opioid Settlement Talks While NGL Energy Falls as Credit Suisse Cuts Price Target

Last week, the Income Strategy advanced 2.36%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.39% gain and the S&P 500’s 0.55% rise. (Exhibit 1). The strategy ended the week up 15.57% YTD, or 380 basis points ahead of the high yield index and 548 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 10/18/191

Time Period Income Strategy ML HY II S&P 500
Last Week (10/11 – 10/18) 2.36% 0.39% 0.55%
MTD 1.16% 0.24% 0.41%
QTD 1.16% 0.24% 0.41%
YTD 15.57% 11.77% 21.05%
Inception (annualized since 4/2/2009) 13.35% 11.04% 15.72%

Source: Bloomberg, Miller Value Partners

Three equities and two bonds comprised last week’s top five contributors (Exhibit 2). Alternative asset managers Carlyle Group (CG) and Apollo Global (APO) continued higher throughout the week with the broad equity market. Further, UBS maintained their “Buy” rating on both stocks ahead of Q3 earnings, citing a strong realization pipeline at Carlyle and healthy gains in Apollo’s public portfolio companies. Debt of Endo International (ENDP) soared on reports that drug distributors and manufacturers were nearing a global opioid settlement. Debt of McDermott (MDR) advanced with peer Aecom (ACM), who announced the sale of its management services business for $2.4B (11.6x EBITDA). Abercrombie & Fitch (ANF) moved above its 50-day moving average.

Exhibit 2: Significant Contributors to Performance, 10/11/19 – 10/18/19

Name Type Return
Endo International 6.0% 7/23 Bond 15.2%
McDermott International 10.625% 5/24 Bond 16.7%
Carlyle Group LP Equity 4.7%
Apollo Global Management Inc Equity 3.2%
Abercrombie & Fitch Co Equity 4.6%

Source: Miller Value Partners

Equities and a bond comprised last week’s top five detractors (Exhibit 3). Credit Suisse maintained their “Neutral” rating on NGL Energy Partners (NGL) but lowered their price target to $14 (from $16), 24% implied upside excluding the 13.8% dividend yield, stating that while they expect sequentially stronger results from the Mesquite acquisition, the incremental benefit may be tempered due to some ramp delays. Citi maintained their “Buy” rating on Sculptor Capital (SCU) but lowers their price target to $41.50 (from $46), 156% implied upside excluding the 7.9% dividend yield. Chico’s (CHS) fell below closely watched technical levels. Erdemir (EREGL TI) fell after the US raised steel tariffs back up to 50% as part of sanctions announced last week. There was no price-changing news on the debt of GEO Group (GEO).

Exhibit 3: Significant Detractors from Performance, 10/11/19 – 10/18/19

Name Type Return
NGL Energy Partners LP Equity -4.6%
Sculptor Capital Management Equity -5.2%
Chico’s FAS Equity -3.7%
GEO Group 6.0% 4/26 Bond -3.7%
Erdemir Equity -2.8%

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 fees 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.

©2019 Miller Value Partners, LLC

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