September 23, 2019

Income Strategy Update for Week Ended 9/20/19

Alternative Asset Managers Rise on Citi Optimism While Retailers Fall

Last week, the Income Strategy declined -0.74%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.28% gain and the S&P 500’s -0.49% fall. (Exhibit 1). The strategy ended the week up 16.30% YTD, or 439 basis points ahead of the high yield index and 483 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 9/20/191

Time Period Income Strategy ML HY II S&P 500
Last Week (9/13 – 9/20) -0.74% 0.28% -0.49%
MTD 5.67% 0.68% 2.36%
QTD 4.56% 1.59% 2.19%
YTD 16.30% 11.91% 21.13%
Inception (annualized since 4/2/2009) 13.52% 11.14% 15.85%

Source: Bloomberg, Miller Value Partners

Equities and a bond comprised last week’s top five contributors (Exhibit 2). Alternative asset managers Carlyle Group (CG) and Sculptor Capital Management (SCU) advanced as Citi reaffirmed their “Buy” rating on both companies with $30 (14% implied upside) and $46 (89% implied upside) price targets, respectively. The analyst cites C-corp conversions broadening the investor base, as well as expected fee-related earnings and related margin expansion driving share prices higher. National CineMedia (NCMI) announced they amended their Exhibitor Services Agreement to allow the shift of ads into the trailer window ahead of a film’s start. B Riley is optimistic on the strategy and remains bullish on the stock, maintaining their “Buy” rating and $9.75 price target, citing the shift should drive incremental in-theatre ad demand with additional revenue and OIBDA expectations of $15M-$31M and $6M-$18M, respectively. Macquarie Infrastructure (MIC) moved above its 50-day moving average. Debt of Chaparral Energy (CHAP) rose as oil jumped last week following attacks on Saudi oil facilities.

Exhibit 2: Significant Contributors to Performance, 9/13/19 – 9/20/19

Name Type Return
Carlyle Group LP Equity 3.1%
Sculptor Capital Management Equity 9.1%
National CineMedia Equity 4.4%
Macquarie Infrastructure Co Equity 2.5%
Chaparral Energy 8.75 7/23 Bond 6.5%

Source: Miller Value Partners

Equities and a bond also comprised last week’s top five detractors (Exhibit 3). Retailers Abercrombie & Fitch (ANF) and Chico’s FAS (CHS) fell over the week. DA Davidson initiated coverage of Abercrombie with a “Neutral” rating and $18 price target, 14% implied upside excluding the 5.1% dividend yield, stating that while the company is in the midst of a multi-year turnaround, progress thus far is encouraging. Morgan Stanley maintained their “Equal-Weight” rating on Chico’s with a $4 price target, 10% implied upside excluding the 9.9% dividend yield. Quad Graphics (QUAD) fell despite forming a golden cross as the 50-day moving average moved above the 100-day. Debt of Endo International (ENDP) fell as RBC more-than doubled its opioid liability estimate from $2.1Bn to $4.4Bn, assuming a ten-year payout, which implies the majority of the company’s free cash flow will go towards liability payments. Danske Bank (DANSKE DC) moved below its 100-day moving average as RBC expressed their concerns on European Banks earnings momentum and whether European Central Bank actions will act as a catalyst to the economy, the key for a re-rating in bank share prices.

Exhibit 3: Significant Detractors from Performance, 9/13/19 – 9/20/19

Name Type Return
Abercrombie & Fitch Co. Equity -11.2%
Chico’s FAS, Inc. Equity -16.2%
Quad Graphics Equity -6.8%
Endo International PLC 6.0 7/23 Bond -3.8%
Danske Bank Equity -6.9%

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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