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 decent appreciation potential, assuming the underlying stock advances.
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Value Line’s proprietary Industry Rank and the Convertible Rank are at least partially driven by Value Line’s 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 AngloGold Ashanti (AU), Pioneer Natural Resources (PXD), and Titan International (TWI).
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Convertible bonds offer an interesting middle ground between a stock and a bond, and thus, an interesting mix of risk and reward. For investors seeking a high level of income, high-yielding convertibles might be a good option. However, a high yield often means increased risk. NorthStar Realty (NRF), Geomet (GMET), and Network Equipment (NWK) all have high coupon convertibles.
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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 themselves. BPZ Resources (BPZ), Molycorp (MCP), and Molina Healthcare (MOH) 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 compared to weaker companies. This quality/yield dynamic, however, isn’t always the case. Indeed, there are some high-quality companies with high-yielding convertibles, such as National Healthcare (NHC), Bunge Limited (BG), and American Equity Investment (AEL).
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Convertible bonds possess characteristics of both 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. Coinstar (CSTR), Tenet Healthcare (THC), and Tech Data (TECD) all have convertibles with so-called favorable equity participation.
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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 good appreciation potential, assuming the underlying stock advances.
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Convertible bonds offer an interesting middle ground between a stock and a bond, and thus, an interesting mix of risk and reward. For investors seeking a high level of income, high-yielding convertibles might be a good option. However, a high yield often means increased risk. Alaska Communications Systems Group (ALSK), Penson Worldwide (PNSN), and US Airways (LCC) all have high coupon convertibles.
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Some investors prefer to focus on just the highest ranked stocks from the most highly 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 stocks where the individual rank is not as high. Micron Technology (MU), Kinross Gold (KGC), and James River Coal (JRCC) are potential 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 fundamentally strong companies are generally expected to offer lower coupons and lesser yields when compared to weaker companies. This quality/yield dynamic, however, isn’t always the case. Indeed, there are some comparatively strong companies, such as Wells Fargo (WFC), Bank of America (BAC), and KeyCorp (KEY), that have high yielding convertibles.
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