Over the last few months, the ongoing trade-war between the U.S. and China has escalated into something of a volatility generating machine, with some market indices jumping up or down hundreds of points in a single day as new tariffs are added, sentiments of certain key political figures are expressed, etc. Causality aside, the markets are boiling and have many investors looking to find a way to beat the heat without having to leave the kitchen entirely. This week, Durig Capital explains how investors can do just that with its Dogs of the S&P 500 Portfolio.
This week, Durig Capital recaps the recent performance of its own unique version of the Dogs of the Dow Strategy and benchmarks it to that of its closest peers. Also explored is the importance of portfolio correlation to the overall market, and how correlation can help to provide investors an idea of how a portfolio could theoretically perform under various market conditions.
Durig’s Dogs of the Dow – July Performance Highlights
12.87% Trailing 1 Year Return
15.98% Annualized Return Since Inception
Beta of 0.72 (vs. Benchmark*)
(Performance shown above is as of 7-31-19)
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The New Dogs on the Block
Last week, Durig Capital reviewed it’s own unique version of the Dogs of the Dow Strategy. Over the years, the Dogs of the Dow Strategy has been adopted by many investors looking to beat the Dow Jones Industrial Average (DJI).
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Last month, Durig Capital explored several variations of the classic Dogs of the Dow Investment Strategy. Later in the article, we examined the historical performance of these strategy variations, benchmarked against the performance of Durig’s own unique Dogs of the Dow Portfolio Strategy. The original strategy designed by Michael O’Higgins in the book “Beating the Dow” in 1991 was designed for just that; beating the Dow Jones Industrial Average (DJI).
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This week, Durig Capital explores a popular variation of the classic Dogs of the Dow investment strategy, introduced by Michael O Higgins in the early 1990’s. The strategy has been widely accepted by some for its simplicity and repeatability, yet denounced by others for the exact same. Durig Capital believes less complicated is better; fewer moving parts mean fewer potential points of failure, and has done well historically with it’s own unique version of this simple strategy, discussed later in the article.
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This week, Durig Capital reviews its own version of a time-proven investment strategy. The Dogs of the Dow investment strategy is a simple way for investors to design a portfolio around the “dogs” of the broader Dow Index, and rebalance it annually. Durig Capital’s Dogs of the Dow (DoD) portfolio has, since its inception in June 2017, resulted in a less volatile portfolio with excellent returns when compared the the broader Dow index.
- A yield-curve inversion, which occurred last week, often signals a recession is coming in the medium term. But RBC’s chief US economist, Tom Porcelli, argues that last week’s yield-curve inversion is different. He says asset bubbles are the real risk as the US economy outperforms the rest of the world.
- “I think there’s a lot less risk in the United States economy than there is in the rest of the world, but those lower yields are in part pushing down yields in the United States as well,” Rosengren said. He added that if his forecast for America’s economic growth of between 2 to 2.5 percent for the rest of the year pans out, and the U.S. starts to hit its inflation target, then the 10-year yield “will go up a little bit from where it is now.”
- Trump claimed that if it wasn’t for the decisions of Federal Reserve Chairman Jerome Powell, the U.S. economy would have expanded above a 4% annual rate in 2018. “Frankly if we didn’t have somebody that would raise interest rates and do quantitative tightening, we would have been at over 4[%] instead of a 3.1[%],”The Fed kept its key policy target unchanged at 2.25% to 2.5% on Wednesday.
This week’s bond review focuses on one of the nation’s largest publicly traded hospital companies. Community Health Systems, Inc. (NYSE: CYH). CYH has spent the past few years divesting hospitals in an effort to reshape its portfolio towards urban and suburban markets. The company continues to make that shift and has now added urgent care centers in some of those markets to help drive additional patients to its hospitals. Its fourth quarter and full-year 2018 results look to be an indicator that the transformation is gaining a foothold.
This week, Durig Capital looks at a longtime company that has adopted a new name to reflect its new direction. Pyxus International, formerly Alliance One, is well into its “One Tomorrow” transformation plan, where it has added new products to its product base of leaf tobacco. The company has entered into producing e-liquids, cannabis and cannabis related products.
This week’s bond review delves into the retail sector with a specialty retailer of durable consumer goods who also offers its customers financing on their purchases. Conn’s Inc., which is headquartered in Texas, has a market presence that stretches across the southern United States. Conn’s set some records in its most recent quarterly results (third quarter for its fiscal year 2019).
- Record third quarter retail gross margin of 41.2%
- Record quarterly credit segment revenues of $89.9 million.
- For the first nine months of fiscal year 2019, the company registered its second highest nine month operating income ever
- Excellent interest coverage of 2.4x.
- Uber $76 billion: Uber Technologies Inc had $50 billion in total bookings for its ride-service and food-delivery businesses last year, a testament to the size and global reach of the company as it prepares to woo investors in one of the biggest public stock listings to date.
This week, Durig Capital looks to the healthcare industry, where a medical supply logistics provider has made some key acquisitions to broaden its revenue sources. Over the past 18 months, Owens & Minor has acquired Byram Healthcare, a direct to patient medical supply distributor, along with Halyard’s surgical and infection prevention (S&IP) business. Combined, these two acquisitions are slated to add $1.45 billion in annual revenues for Owens & Minor. The company’s last reported quarterly results (third quarter 2018) show revenue growth coming through these most recent additions.
This week, Durig Capital reviews its own version on a time-proven investment strategy. The “Dogs of the Dow” investment strategy was introduced by Michael B. Higgins in the early 1990’s as a simple way for investors to design a portfolio around the “dogs” of the broader Dow index, and re-balance it annually. Durig Capital has created its own version on this investment strategy which has historically resulted in a less volatile portfolio and has produced excellent returns since its inception in June 2017.
Since its inception (June 6, 2017) Durig’s “Dogs of the DOW” Portfolio has generated a total return of 14.26% (as of January 22, 2019). Over the same time period, the greater Dow index generated a return of 11.37%. So, Durig’s “Dogs of the DOW” portfolio returned 25% more than the index.
Most notably, during the selloff in the fourth quarter of 2018, Durig’s portfolio was down -5.23% while the greater Dow index was down -11.30%. These figures are as of January 22, 2019.
Year-to-date in 2019, the Durig portfolio was up 1.56%, while the greater Dow index was up 4.71% (as of January 22, 2019). This statistic, along with the results from fourth quarter 2018 illustrate the portfolio’s reduced volatility.
This week, Durig Capital ventures to the technology sector to review an issuer involved in the design and manufacture of semiconductors. Magnachip Semiconductor (NYSE:MX) has been around for over 30 years and is the largest independent supplier of OLED display drivers to panel makers for smartphones. The company’s latest reported quarterly results (three months ending September 30, 2018) were excellent.
Adjusted EBITDA increased 13% year-over-year.
Gross profits were up 10.8% over the prior year period.
Operating income increased by 17.9% over Q3 2017.
Revenues were up 16.6% year-over-year and were at the highest levels since Q4 2012.
Interest coverage over 3x for the third quarter.
This week, Durig Capital takes a look at a leading marine transportation company. Teekay Corporation provides marine transportation, storage, and vessel leasing for the oil and natural gas industry. The company’s third quarter saw increases in its subsidiaries revenues over second quarter. Here are some highlights from its third quarter results.
Teekay Tankers nearly doubled its quarterly revenues from the prior year period.
Teekay Corporation recorded adjusted cash flow from vessel operations of $19.8 million as compared to $1.2 million a year earlier.
Teekay LNG revenues increased to $123.3 million as compared to $104.3 million a year earlier.
- Endeavor currently offers streaming for the NFL, NBA, UFC, and Euroleague. In announcing the launch, the newly formed division has added new clients WWE and their WWE Network, one of the largest sports-entertainment OTT platforms in the world.
This week, Durig Capital reviews a bond from an issuer that was snapped up a few years ago by one of the most enigmatic figures in corporate America. In late 2016, SolarCity was acquired by Elon Musk’s company, Tesla. The acquisition made sense- combine the maker of electric cars and energy storage with a company that produces solar panels that produce energy (seemingly to ultimately charge Tesla’s vehicles). Tesla has since integrated SolarCity’s products into the Tesla portfolio. Tesla’s most recent reported quarter (Q3 2018) was truly historical.
Free cash flow of $881 million.
Operating income of $417 million
Cash flow from operations of $1.4 billion.
Interest coverage in Q3 of 2.4x.
- Thus far, the Dow has climbed 10.1% from its Dec. 24 low, while the S&P 500 has gained 10.4% from that Christmas Eve low, when stocks put in the worst trading action on the trading day before Christmas on record.
- A partial government shutdown, Treasury Secretary Steven Mnuchin’s questions about banks’ health and signals that President Donald Trump could fire Federal Reserve Chairman Jerome Powell upset markets on Monday, sending the Dow down. After markets tanked on Christmas Eve, Trump said Tuesday that he remains confident in Mnuchin, renewed his criticism of the Fed, accusing it of hiking rates too fast.
This week’s bond review ventures into the auto world, specifically car rentals. Hertz is one of the leading auto rental companies in the U.S. and around the world. The company recently posted its financial results for its third quarter, presenting solid evidence that the 2017 Transformation Plan is continuing to bear fruit. Some of the company’s excellent Q3 results include the following:
A 52% increase in in global net income.
U.S. adjusted corporate EBITDA increased by 25% year-over-year.
Revenues for U.S. operations also increased 10% year-over-year.
This week, Durig Capital takes a second look at an iconic cosmetic company that is continuing to refine its market strategy. Revlon, founded in 1932, has been identified with some of Hollywood’s biggest stars over the years. The company, under the direction of a new President and CEO, has recently posted some fantastic results for the third quarter including:
Adjusted operating income increased by 82% year-over-year.
A 35% increase in Adjusted EBITDA.
An increase in e-commerce sales of 23%.
Significant sales increases in China as well as North America.
- The inverted yield curve has preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning point of the business cycle.
- The builder sentiment has long been considered an early read on the pace of construction, a sharp drop may presage something more sinister than a slower pace of building. Home builders were one of the first groups to feel the top of the market cycle just before the Great Recession. In June 2005.
Durig Capital’s FX2: Bond Investing with Equity-like Returns
Stocks versus bonds – which is the better investment? This is a highly individual question and depends on the goals of the investor. For most investors, getting the best return with the least amount of risk is a goal worth striving for. But what is the best way to do this? While stocks have generally outperformed bonds, there are exceptions to the rule. Consider Durig Capital’s FX2 Managed Income Portfolio.
This portfolio’s 3-year trailing return has handily beat the S&P 500 index.
Not only has its returns exceeded that of the S&P 500 index, it has done so with roughly half the risk (volatility).
Morningstar claimed that FX2 was the top performing Fixed Income SMA among its peer group in the last significant interest rate spike of 2016.
Additionally, Morningstar has ranked Durig Captial’s FX2 portfolio as the top performing Fixed Income SMA for Trailing 1-year, 3-year, and 5-year returns, as well as for Q1 and Q2 of 2018, amongst a peer group of over 800 SMA’s.
Informa ranked FX2 1st in performance in 1,2,3 and 5 year return categories, as well as since inception, as compared to its peers in Short-Term Fixed Income.
This week, Durig Capital looks to the skies as it reviews an issuer that is focused on the design and manufacture of aircraft parts and systems. Triumph Group has spent the past few years shedding non-core business assets, consolidating locations and streamlining its operations with an eye to cost reductions. Its latest quarterly results showcase its progress on this journey. Its fiscal year 2019 first quarter results included the following:
A 6.5% increase in net sales as compared to Q1 FY 2018
An increase of 126% in adjusted EBITDA as compared to the prior year period.
Interest coverage was an outstanding 2.3x for Q1
Triumph Group is projecting a 5% increase in net sales in FY 2019.
Backlog increased by 5% over the previous year period.
Diversification is the word this week as Durig Capital takes a second look at the number two grocer in the United States. Albertsons recently posted its first quarter results for fiscal year 2018. The company showcased some impressive financials including the following:
Adjusted EBITDA of $815.8 million, an increase of 5.7% year-over-year.
39% increase in net cash provided by operating activities.
108% increase in e-commerce sales.
Interest coverage of nearly 3x.
This week’s bond issuer is a company entrenched in production and transportation of natural gas. CSI Compressco’s (CCLP) first and second quarters have been outstanding, both recording consecutive increases in revenues. The oil and gas industry’s activity level has been steadily increasing over the past 18 months and CCLP has started to see the effects of this on all three of its business segments – Compression Services, Aftermarket Services, and Equipment Sales. Its second quarter results gives investors reason to look twice at this natural gas services company.
Q2 revenues increased 33% year-over-year, and 17% over Q1 2018.
Adjusted EBITDA increased 21% over Q1 and 19% year-over-year.
Compressions Services increased gross margin by 460 basis points.
At the conclusion of Q2, new equipment sales had generated a backlog of $102 million, revenue to be recognized later this year and the first half of 2019.
This week, Durig Capital takes a look at an oil and gas producer who has balanced its revenue streams between oil, natural gas and natural gas liquids (NGLs). Approach Resources has posted excellent results the past two quarters and has some unique advantages amongst oil and gas producers – significant, contiguous acreage, 100% owned infrastructure, improved well recovery and a balanced product portfolio. It’s most recent quarter continued the positive trend set in Q1.
A 21% increase in revenues year-over-year.
Production increases over Q1 by 2%, at the high end of quarterly guidance.
18% increase in EBITDAX.
Interest coverage of 2.7x.
This week, Durig Capital takes a look at a 130-year old company, whose name is synonymous with direct selling. Avon Products is now a global manufacturer and distributor of a wide range of beauty products. The company’s recently posted its most recent quarterly results. Some of the highlights include:
A 62% increase in operating profit.
The company’s average order was up 6%.
- Operating margin was up 160 basis points over last year’s Q2.
This week’s bond focus takes a third look at a global specialty retailer of health and wellness products. Durig Capital’s last review of GNC discussed the Harbin China deal. While that deal is currently awaiting regulatory approval, GNC has since reported its second quarter results. The company continues to report successes in several areas.
Q2 international segment sales increased 11% year-over-year.
E-commerce sales increased by 8.3%
The company’s myGNC and ProRewards customer loyalty programs grew 14% and 8.8% respectively over Q1 levels.
Q2 interest coverage was a healthy 1.8x.
This week, Durig Capital looks to the healthcare sector where a specialty pharmaceutical company has posted solid back-to-back quarters resulting in increased guidance for 2018. As a result of Mallinckrodt Pharmaceuticals’ performance in both Q1 and Q2, company management has raised 2018 guidance citing solid performance across its product lines. Some of the highlights from Mallinckrodt’s Q2 numbers include:
Q2 cash flows from operating activities grew by 17.6% over the same period last year.
Net sales increased 5.3% year-over-year.
Adjusted Gross Profit increased by 8.4%
Year-to-date debt reduction of $535.2 million
Interest coverage over 2x for the first six months of 2018.
This week, Durig Capital looks again at Parker Drilling, a company that provides contract drilling / drilling related services and rental tools to the oil industry. (Durig Capital reviewed Parker Drilling in June 2015). Having survived the unprecedented declines in oil prices over the past three years, Parker Drilling has emerged as a leaner, more competitive company. Its most recent quarterly results show a company that continues to perform.
Q2 adjusted EBITDA growth of 39% year over year.
Consecutive quarterly revenue growth of 8.1%.
Gross margin as a percentage of revenues increased to 22.8%, up from 16.5% in Q1.
Q2 interest coverage ratio of 2.4x.
This week’s bond review focuses on a company involved in tertiary oil production. Denbury Resources produces oil using carbon dioxide injections to draw more oil out of fields that have exhausted their production from conventional methods. Denbury has had a fantastic year since our last review of the company and has just posted results from the company’s second quarter. Highlights include:
56% increase in revenues.
Production growth of 4%.
Adjusted Cash Flow from Operations increased 106% year-over-year.
Q2 interest coverage was 3.4x
This week’s bond review shines a light on the solar industry, focusing on the second largest solar company by revenues. Canadian Solar has experienced outstanding growth over the past few years, with revenues growing by nearly 19% between 2016 and 2017. In addition, the company is projecting revenue growth this year of over 35% over last year. Growth has been driven by the large demands in China in recent years, but also increased demand in countries such as Brazil, Mexico and India. Canadian Solar’s first quarter results show the company is off to a solid start this year.
Gross profit in Q1 increased 57% over Q1 2017.
Net revenue in Q1 was up an impressive 110.5% from Q1 2017.
Operating expenses and general and administrative expenses both decreased year-over-year in Q1.
Interest coverage for Q1 was a solid 2.6x.
This week’s bond review delves into the retail sector with a specialty retailer of durable consumer goods who also offers its customers financing on their purchases. Conn’s Inc., which is headquartered in Texas, has a market presence that stretches across the southern United States. It’s most recent quarterly results show a company registering wins from a multi-year planned strategic repositioning. Total operating income increased by 62.3% over the prior year period. In addition, Conn’s posted a record quarterly retail gross margin of 39.6%. The company’s credit segment had positive outcomes as well, generating its first positive operating income in four years as credit revenues grew over 8% year over year. Conn’s continues to grow, opening two new stores in its most recent quarter, with more scheduled for this fiscal year. The company’s 2022 bonds are in demand right now, with a yield-to-maturity of about 7.18%. This competitive yield as well as the opportunity for diversification into the retail sector, makes these bonds a smart addition for Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the recent performance of which is shown below.
This week’s bond review ventures into the auto world, specifically car rentals. Hertz is one of the leading auto rental companies in the U.S. and around the world. The company has posted three back to back quarters where global revenues have increased year-over-year. It’s most recent quarter registered an 8% increase in total revenues, with adjusted corporate EBITDA improving by $51 million. For Q1, the company also posted solid cash flows from operating activities of $401 million as well as an outstanding interest coverage ratio of 3.5x. Hertz has also recently begun a revitalization plan to improve its U.S. based revenues, including improving its technology platforms, customer service, marketing and fleet optimization. The company’s 2022 bonds, with a yield to maturity of around 9.4%, offer a fantastic opportunity to add diversification into the retail / consumer auto industry and make an ideal addition to Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the recent performance of which is shown below.
This week’s bond review revisits the parent company of a beloved family entertainment restaurant that has a long and distinguished history in the childhood of many Americans. CEC Entertainment is the parent company of Chuck E. Cheese as well as Peter Piper Pizza. The company recently posted results from its first quarter 2018.
This week, Durig Capital takes another look at one of two publicly held global leaf tobacco merchants. The last review of Alliance One earlier this year revealed that the company had made its entrance into the e-cigarette market through its acquisition on Purilum, an e-liquids producer. Now Alliance One is taking further steps to diversify its product offerings into both the cannabis and industrial hemp markets. Additionally, the company recently released its Q4 and FY 2018 results. Fiscal year 2018 recorded improvements over the previous year, including: