Generally speaking, companies with solid financial positions make safer investments than those with weak balance sheets. That said, convertibles issued by high quality companies are generally expected to offer lower coupons and small yields when compared to weaker companies. This quality/yield dynamic, however, isn’t always the case. Indeed, there are some high quality companies that have high yielding convertibles.
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The conversion feature of a convertible security hardly has any value if the common stock underlying that convertible trades below the effective conversion price. Convertibles in this situation are usually referred to as “busted.” Many fixed-income investors find these so called “busted” convertibles attractive because they often offer a generous yield and appreciation potential, assuming the underlying stock advances.
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In this low-interest environment, investors are constantly looking for investments that offer higher returns, at relatively low risk. Convertible bonds can offer both.
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Value Line’s proprietary Industry Rank and the Convertible Rank are at least partially driven by Value Line’s proprietary stock Timeliness Rank. Although the three are intertwined to some degree, it is interesting to overlay all three ranks to try and cull out “the best of the best,” in the convertible space. Some companies with convertibles that pass this tough screen include
Goodyear Tire (GT),
Hawaiian Holdings (HA), and
Sunrise Senior Living (SRZ).
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In this low-interest environment, investors are constantly looking for investments that offer higher returns, at relatively low risk. Convertible bonds can offer both.
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Some investors prefer to focus on just the highest-ranked companies from the highest-ranked industries. There is nothing wrong with this approach. However, there are often bargains to be found in highly ranked industries if one is willing to consider companies that are not as highly ranked.
Central European Media (CETV),
National Healthcare (NHC), and
United Continental Airlines (UAL) are examples of just such situations.
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Generally speaking, companies with solid financial positions make safer investments than those with weak balance sheets. That said, convertibles issued by high-quality companies are generally expected to offer lower coupons and smaller yields when compared to weaker companies. This quality/yield dynamic, however, isn’t always the case. Indeed, there are some high-quality issues, such as Alaska Communications (ALSK), Universal Corporation (UVV), and Apollo Investment (AINV) that have high-yielding convertibles.
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Convertible bonds are hybrid between stocks and bonds. Owning convertibles that are sensitive to the movement of their issuing company’s common stock is a way to potentially increase return and reduce risk compared to owning only the common stock. AGCO Corp. (AGCO), Tenet Healthcare (THC), and Victor Group (VGR) all have convertibles with so called favorable equity participation.
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