In today's volatile economic landscape, investors are constantly seeking anchors to stabilize their financial voyages. One such anchorage is Miller Value Partners, a firm that stands tall with its value investing approach, emphasizing businesses over stocks and long-term commitment over quick gains.
Performance highlights
In the second quarter of 2023, Miller Value Partners reported a commendable 3.14% net return through its Miller Income Strategy, trouncing the 1.63% return of the ICE BofA US High Yield Index. Such feats are emblematic of the company's prowess in navigating the choppy waters of the financial markets.
But amidst these strides, a looming specter has caught the attention of many: the inverted yield curve, historically seen as a harbinger of economic downturns. However, considering the unique period of economic evolution we are traversing, the old rules might not apply.
The fallacy of TINA
In recent years, the investment rationale "there is no alternative," or TINA, to equities made rounds due to disappointing bond yields. But times have changed. With two-year Treasury notes now offering yields nearing 5%, the TINA narrative for minimal bond allocation crumbles.
This shift is redefining the investment terrain, potentially redirecting capital toward non-tech sectors which have seen exuberant valuations reminiscent of the tech bubble two decades ago.
Beware of predictions
Many analysts and forecasters often rely on historical patterns to predict future movements. One prevalent prediction warns of an impending recession, citing the inverted yield curve. But predictions are precarious. As we learned from the Covid-induced recession, which blindsided forecasters, it is crucial to remember that each economic scenario is unique.
Moreover, with advancing knowledge and an arsenal of tools available to policymakers today, we may witness unprecedented economic events. Could we see a persistently inverted yield curve without a recession on the horizon? Quite possibly.
Other economic indicators
While some fixate on the yield curve, other robust economic indicators suggest optimism. Homebuilders' stocks are touching new peaks, even as mortgage rates reach multidecade highs – a testament to consumers' faith in the future. After a hiatus, real hourly wages are growing, empowering consumers. Further, a subdued VIX and declining inflation rates paint a reassuring economic picture.
Significant changes in the quarter
In the most recent quarter, Miller Value Partner increased its stake in Western Alliance Bancorp (WAL, Financial)and initiated position in Stellantis NV(STLA, Financial), the powerhouse behind automotive stalwarts like Jeep, Dodge and Fiat.
Several facets of Stellantis' financial position and strategy caught the fund's discerning eye:
- Rewarding dividends: A striking near-8% dividend yield is not just attractive, but also indicative of the company's robust financial health.
- Financial resilience: The company's ledger boasts net cash reserves that, when adjusted for debt, have the mettle to support the current dividend rate for a commendable five-year trajectory.
- Market misreading: Despite trading at a modest 1.7 times of its operating profits, there seems to be an overarching sentiment in the market predicting a wane in its cash flow.
- Alignment of interests: Insiders hold a 14% stake in the company; their alignment with shareholder interests is undeniable. This shared vision is further accentuated by their affirmative action to repurchase an estimated 3% of outstanding shares in the forthcoming year, underlining their confidence in the firm's valuation.
Miller's approach
Against this backdrop, Miller Value Partners' approach remains unwavering. The firm's portfolio construction does not hinge on forecasts. Instead, it invests in undervalued businesses and bonds, as illustrated by the increased stake in Western Alliance and a new position in Stellantis, driven by their compelling valuations.
In essence, while the debate on the implications of the inverted yield curve rages on, firms like Miller Value Partners underline the importance of a disciplined, value-driven approach. The future, as always, remains uncertain, but with astute strategies, investors can hope to weather any storm.
