April 29, 2019

Income Strategy Update for Week Ended 4/26/19

Alternative Asset Managers Continue Higher While Sberbank Falls Despite Goldman Sachs Optimism

Last week, the Income Strategy was flat, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.18% rise and the S&P 500’s 1.21% advance. (Exhibit 1). The strategy ended the week up 14.58% YTD, or 583 basis points ahead of the high yield index and 342 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 4/26/191

Time Period Income Strategy ML HY II S&P 500
Last Week (4/18 – 4/26) 0.00% 0.18% 1.21%
MTD 3.59% 1.26% 3.83%
QTD 3.59% 1.26% 3.83%
YTD 14.58% 8.75% 18.00%
Inception (annualized since 4/2/2009) 13.93% 11.30% 16.23%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Alternative asset managers continued higher in conjunction with the broad equity market, as well as on sell-side optimism following Blackstone’s (BX) conversion to a C-corp. Citi added Blackstone to their US Focus List, citing that the conversion better aligns the company’s strong fundamentals with its deep intrinsic value, setting the stage for additional upside in the shares. The analyst has a $51 price target on the stock, 26% implied upside excluding the 3.7% dividend yield. In addition, Citi added Apollo Global Management (APO) and Carlyle Group (CG) to their 30 Day Positive Catalyst Watchlist with price targets of $42.50 (27% implied upside) and $36 (69% implied upside), respectively. For Apollo, the analyst cites substantial fee-related earnings and permanent capital exposure, making them a likely candidate for C-Corp conversion, in their view, while Carlyle may be less likely due to higher conversion-related dilution risk. Arlington Asset Investment (AI) rose above its 50 and 100-day moving averages on Credit Suisse raising 2020-2021 earnings estimates to $1.60 and $1.60 (from $1.55/$1.55). The analyst is optimistic on Mortgage REITs, citing a favorable environment with continued low volatility, in addition to stable returns on equity, improving credit quality, and attractive dividend yields. There was no price-changing news on the Debt of Avon Products (AVP).

Exhibit 2: Significant Contributors to Performance, 4/18/19 – 4/26/19

Name Type Return
Apollo Global Management LLC Equity 3.9%
Blackstone Group LP Equity 5.0%
Carlyle Group LP Equity 2.3%
Arlington Asset Investment Corp Equity 3.8%
Avon Products 7.0% 3/23 Bond 1.7%

Source: Miller Value Partners

Equities comprised last week’s top five detractors (Exhibit 3). Goldman Sachs reiterated their Buy rating on Sberbank (SBER LI) with a RUB 355 price target, 55% implied upside excluding the 7.0% dividend yield, citing expectations for a rebound in net interest margins and stabilizing deposit rates. Alrosa’s (ALRS RX) Board recommended a dividend payment of RUB 4.11 per share (10.6% trailing twelve month yield), lower than consensus of RUB 4.47, representing 100% of 2H18 free cash flow. British American Tobacco (BATS LN) fell in sympathy with peer Altria (MO), who reported weaker-than-expected Q1 EPS, driven by cigarette volumes coming in below expectations. The group also fell on news Walgreens is raising the minimum tobacco purchase age to 21. National CineMedia (NCMI) fell below its 50-day moving average. There was no price-changing news on Quad Graphics (QUAD).

Exhibit 3: Significant Detractors from Performance, 4/18/2019 – 4/26/19

Name Type Return
National CineMedia Equity -6.2%
Sberbank Equity -5.2%
Alrosa Equity -3.2%
Quad Graphics Equity -5.1%
British American Tobacco Equity -2.6%

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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