June 1, 2020

Income Strategy Update for Week Ended 5/29/20

Debt of Bed Bath & Beyond Rises with Odeon Upgrade While GameStop Notes Fall as Board Battle Heats-Up

Last week, the Income Strategy advanced 3.36%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s 1.82% gain and the S&P 500’s 3.04% rise. (Exhibit 1). The strategy ended the week down -27.48% YTD, or 2,177 basis points behind the high yield index and 2,251 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 5/29/201

Time Period Income Strategy ML HY II S&P 500
Last Week (5/22 – 5/29) 3.36% 1.82% 3.04%
MTD 5.04% 4.56% 4.76%
QTD 17.74% 8.53% 18.19%
YTD -27.48% -5.71% -4.97%
Inception (annualized since 4/2/2009) 10.12% 10.06% 15.13%

Source: Bloomberg, Miller Value Partners

Three bonds and two equities comprised last week’s top five contributors. Debt of Bed Bath & Beyond (BBBY) rose as Odeon Capital upgraded the notes to “Buy”, stating the unsecureds look mispriced given a significant liquidity position, as well as expectations that strategic initiatives implemented by new CEO Mark Tritton will drive a successful turnaround. Debt of Diebold Nixdorf (DBD) rose in conjunction with DA Davidson maintaining their “Buy” rating on the equity, citing sizeable upside potential driven by revenue levers to its Banking vertical as economies reopen and a longer-term shift to low-to-no-touch retail delivery channels. Alternative asset manager Apollo Global Management (APO) rose in sympathy with the broad equity market while Chaparral Energy (CHAP) and Sberbank (SBER LI) jumped with WTI’s move to its highest level since early March.

Exhibit 2: Significant Contributors to Performance, 5/22/20 – 5/29/20

Name Type Return
Bed Bath & Beyond 5.165% 8/44 Bond 23.3%
Diebold Nixdorf 8.5% 4/24 Bond 7.8%
Apollo Global Management Equity 5.3%
Chaparral Energy 8.75% 7/23 Bond 69.2%
Sberbank Equity 7.9%

Source: Miller Value Partners

Three bonds and two equities also comprised last week’s top five detractors. Credit Suisse maintained their “Outperform” rating on Two Harbors (TWO) with a $6 price target, 24% upside excluding the 4.1% dividend yield. The analyst did, however, lower 2020-2021 earnings estimates to $0.65 and $0.66, respectively (from $0.93 and $0.85) to incorporate available asset yields and funding costs in the current mortgage market. Cedar Fair (FUN) fell despite Goldman Sachs initiating coverage with a “Buy” rating and $43 price target, 33% upside from current levels, stating the company is the best positioned in its group for reopenings and with the stock trading at less than 9.5x EV/EBITDA, it’s at a half-turn discount to its 5yr average. Endo International (ENDP) announced early debt tender results with 95% and 97% of the principal amount outstanding under the 2023s and 2025s, respectively being tendered. Debt of GameStop (GME) dropped slightly as the company’s board battle with Permit Capital and Hestia Capital intensified, with both sides urging shareholders to vote for their nominees. There was no price-changing news on the debt of Alliance Resource Partners (ARLP).

Exhibit 3: Significant Detractors from Performance, 5/22/20 – 5/29/20

Name Type Return
Alliance Resource Partners 7.5% 5/25 Bond -1.8%
Two Harbors Investment Corp Equity -5.2%
Cedar Fair Equity -1.3%
Endo International 6.0%7/23 Bond -1.1%
GameStop 6.75% 3/21 Bond -1.4%

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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