The Intellectual Investor: Income Opportunity Weekly Updates

January 17, 2017

LMM Income Opportunity Strategy Update for Week Ended 1/13/17

Contributors Rise on Light News While Detractors Fall on Downgrades

Last week, the LMM Income Opportunity Strategy gained 0.12%, outperforming the S&P 500’s -0.09% loss, but underperforming the Merrill Lynch U.S. High Yield II Index’s 0.15% advance (Exhibit 1). The strategy ended the week up 3.19% YTD, or 211 basis points ahead of the high yield index and 152 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of LMM Income Opportunity Strategy Versus High Yield, Equity Indices, Through 1/13/171

Time Period Income Opportunity ML HY II S&P 500
Last Week (1/6 – 1/13) 0.12% 0.15% -0.09%
MTD 3.19% 1.08% 1.67%
QTD 3.19% 1.08% 1.67%
YTD 3.19% 1.08% 1.67%
Inception (annualized since 4/2/2009) 15.55% 12.89% 16.06%

Source: Bloomberg, LMM

All five of last week’s top five contributors were equities (Exhibit 2). Fortress Transportation & Infrastructure (FTAI) was upgraded at Bank of America to a buy rating with a price target of $16, 10.6% above where it currently trades. The analyst sited significant upside potential in 2017 as dividend coverage could drive a re-rating in the stock and narrow its current discount to peers. Arlington Asset Investment (AI) advanced as it broke above its 50-day moving average. There was no other price-changing news on GEO Group (GEO), Carlyle Group (CG) or BGC Partners (BGCP).

Exhibit 2: Significant Contributors to Performance, 1/6/17 – 1/13/17

Name Type Return
GEO Group Equity 6.6%
Fortress Transportation & Infrastructure Equity 6.0%
Carlyle Group Equity 1.8%
BGC Partners Equity 2.8%
Arlington Asset Investment Equity 2.2%

Source: LMM LLC.

Three equities and two preferreds comprised last week’s top five detractors (Exhibit 3). JMP Securities downgraded William Lyon Homes (WLH) to market perform from market outperform, sending the shares down -6%. The analyst cited increasingly difficult comps in 2017 and believes the stock currently trades at fair value. GameStop Corp (GME) declined as it saw holiday sales fall -16% YoY. Comparable store sales also decreased -18.7% vs. an estimate of -8.8%. Macquarie downgraded the stock on the news to neutral with a price target of $23, -2% below where it currently trades. Seagate Technology (STX) declined as it fell below its 50-day moving average. The company also announced that it will be closing a disk drive factory in China and cutting jobs. There was no price-changing news on Fortress Investment Group (FIG) or Frontier Communications (FTR).

Exhibit 3: Significant Detractors from Performance, 1/6/17 – 1/13/17

Name Type Return
Fortress Investment Group Preferred -3.5%
William Lyon Homes 6.5% Equity -3.8%
GameStop Corp. Equity -7.3%
Seagate Technology Equity -4.1%
 Frontier Communications Corp 11.125% Preferred  -3.6%

Source: LMM LLC.

Did you know that we write this piece for Opportunity Equity as well? Check it out.

1The performance figures reflect the deduction of a model investment management fee of 1% (the highest fee for separate accounts under our fee schedule) and certain other expenses. For important additional information about Income Opportunity Strategy performance, please click on the Income Opportunity 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 LMM.

Any views expressed are subject to change at any time, and LMM 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.

©2017 LMM LLC. LMM LLC is owned by Bill Miller and Legg Mason, Inc.

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