June 15, 2020

Income Strategy Update for Week Ended 6/12/20

High Yield E&Ps Catch a Bid While Chico’s Falls Post-Earnings

Last week, the Income Strategy declined -5.08%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s -1.50% fall and the S&P 500’s -4.73% loss. (Exhibit 1). The strategy ended the week down -23.38% YTD, or 1,934 basis points behind the high yield index and 1,840 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 6/12/201

Time Period Income Strategy ML HY II S&P 500
Last Week (6/5 – 6/12) -5.08% -1.50% -4.73%
MTD 5.65% 1.75% -0.01%
QTD 24.40% 10.45% 18.19%
YTD -23.38% -4.04% -4.98%
Inception (annualized since 4/2/2009) 10.62% 10.19% 15.07%

Source: Bloomberg, Miller Value Partners

Four bonds and an equity comprised last week’s top five contributors. High yield E&P’s Chaparral Energy (CHAP), Occidental Petroleum (OXY), and Extraction Oil & Gas (XOG) caught a bid last week as OPEC+ agreed to extend production cuts. Additionally, Occidental announced they are considering divesting Middle East assets valued at more than $1Bn in an effort to further reduce debt. Annaly (NLY) cut their quarterly dividend 12% to $0.22/share (12.7% annualized yield), which management expects to be more than covered by Q2 core EPS. Additionally, the company announced they repurchased $100M of stock to date in Q2. There was no price-changing news on the debt of Diebold Nixdorf (DBD).

Exhibit 2: Significant Contributors to Performance, 6/5/20 – 6/12/20

Name Type Return
Chaparral Energy 8.75% 7/23 Bond 23.9%
Occidental Petroleum 4.4% 4/26 Bond 3.4%
Diebold Nixdorf 8.5% 4/24 Bond 0.9%
Extraction Oil & Gas 7.375% 5/24 Bond 78.0%
Annaly Capital Management Equity 1.9%

Source: Miller Value Partners

Four equities and a bond comprised last week’s top five detractors. Citigroup downgraded Apollo Global Management (APO) to “Neutral” with a $58 price target, 15% implied upside excluding the 3.3% dividend yield. The analyst cited that after a long-term “Overweight” rating, he sees a more balanced risk/reward at current valuations following the rally off March lows. Chico’s (CHS) reported Q1 revenue of $280.3M, below consensus of $324.7M driven by store closures over the period and partially offset by double digit Y/Y growth in e-commerce. EPS of $(0.63) was wider-than-expected versus estimates of $(0.28) on roughly $1.00/share in inventory write-offs, store impairments, and occupancy cost deleverage. Management cited, however, a strong start to the year with February comps +2.7% and strong momentum into March pre-pandemic.  The company did not provide updated guidance but noted expectations to realize $230M in cost savings and is proactively taking steps to maximize cash flow. Stifel Nicolaus maintained their Buy rating on Cedar Fair (FUN) and raised their price target to $44, 26% implied upside from current levels. Shares, however, fell as fears of a second wave of COVID-19 surfaced, which also weighed on the debt of Bed Bath & Beyond (BBBY).

Exhibit 3: Significant Detractors from Performance, 6/5/20 – 6/12/20

Name Type Return
Apollo Global Management Equity -7.4%
Chico’s FAS Equity -31.3%
Cedar Fair Equity -9.2%
Bed Bath & Beyond 5.165% 8/44 Bond -6.0%

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

Read more posts about: