Research Hub

With most equity markets in a state of flux, investors are seeking safer havens, buying up corporate bonds and government securities. Some investors have found buying opportunities among downtrodden securities, convertibles included.

The exceptional leverage provided by warrants makes them ideal candidates for hedging. A warrant hedge consists of a long position in a warrant and a short position in the underlying common stock.

One of the issues common-stock investors face when waiting for a downtrodden issue to rebound is that their capital is tied up and unavailable for other, possibly more productive, uses. However, financial instruments, such as warrants, can help mitigate this problem. Indeed, they may be a good option for long-term investors that are bullish on battered stocks or sectors, such as financials.

Our recommended convertibles posted a 6.9% gain for the first quarter of 2011, beating most major indicies.

Greatbatch, Inc. (GB), the pioneer in pacemaker devices is an interesting investment in the healthcare/medical devices sector, as medical practitioners implant these devices almost on a daily basis. But because failure in any of these devices can send shock waves throughout the industry, investors can avoid volatility by investing in Greatbatch’s 2.25% convertible notes due 2013.

The volatile equity markets have caused investors to again rethink their investment strategies. As the markets gyrate, investors often run to seek safer havens for their investment dollars. One area that affords income, safety, and participation in the equity markets, all at once, is convertible securities. This week our recommendations include Buy, Sell, and Hold advice about convertibles issued by Orbital Sciences Corp., Archer-Daniels-Midland Company, Mentor Graphics Corp., and NuVasive, Inc.

As a group, Value Line’s recommended convertibles gained 2.5% on a total return basis in February, while the stocks underlying them, as a group, rose 4.4%. Recommended Rank 1 convertibles rose 3% for the month, and 5.9% for the first two months, which beat all major equity indices. This week we have seven trade recommendations.

The Value Line Convertibles Survey assigns a Performance Rank to convertibles in our database whose underlying common stock is ranked for Timeliness/Performance in one of its sister publications, The Value Investment Survey or The Value Investment Survey Small and Mid-Cap Edition. Not all the convertibles in our database are ranked, though. Of the 622 convertible bonds and preferred stocks currently in our Survey, 131 (or about 21%) are unranked. Unranked convertibles are not considered for inclusion on our Especially Recommended list. However, the absence of a rank does not necessarily mean that a convertible is a bad investment.

Rising crude oil prices continue to drive global economies to seek alternative energy sources, and investors are being drawn toward these stocks in recent times. One such stock is SunPower Corporation (SPWRA), a developer and manufacturer of solar-electric products. After a setback in 2009, when the stock price plunged from a high $134 in 2008 to $46 in 2009, the company seems to be on the road to recovery. Because of the inherent risk, however, long-term investors should consider the company’s 4.75% senior convertible notes that mature in 2014.

With the earnings season almost behind us, companies are aggressively seeking ways to improve their balance sheets. Ford Motor Company (F) continues to reduce its debt level with the redemption of two convertible securities. Meanwhile, Wright Medical Group (WMGI) began a tender offer to buy back any and all of its 2.625% convertible senior notes for cash.