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The Value Line Investment Survey reviews and ranks 98 industries on a weekly basis, based on the average rank of all stocks within a given industry. The assigned ranks indicate expected performance of the industry over the upcoming six to 12 months. The Timeliness rank assigned to each of the approximately 1,700 common stocks covered by Value Line depends on, among other things, the stock’s historical price momentum and expected price performance over the next six to 12 months.

The rank of the underlying common stock is a major factor in determining the rank of a convertible. Unlike the common rank, which predicts price performance only, the rank assigned to a convertible is risk-adjusted and predicts total return, which includes price changes and interest or dividend income.

So, while the Industry Rank and the Convertible Rank are at least partially driven by the Timeliness Rank, it is interesting to overlay the three ranks to try and determine “the best of the best,” if you will. Below is a partial screen of highly ranked convertibles, whose underlying common stocks are highly ranked, and that operate in highly ranked industries.

 

<-- Convertible -->

Investment

<---Common------>

Common

 

Convertible Securities

 Yld(%)

YTM(%)

Grade

Price*

Yield(%)

Ticker

Industry

CSX Corp 0s10/21               

Nil

 NMF

D

$21.64

1.5

CSX 

Railroad

Pioneer Natural Res. 2.875s2038

1.8

0.6

D

$89.82

0.3

PXD 

Petroleum

Newmont Mining 1.625s2017 (144A

1.1

 NMF

D

$65.46

0.9

NEM 

Gold/Silver

AngloGold Ashanti $3.00        

5.9

 PFD

G

$45.14

0.4

AU  

Mining

Group 1 Auto. 2.25s2036        

2.2

2.2

G

$46.12

 NIL

GPI 

Retail (Special Line)

LifePoint Hospitals 3.5s2014   

3.4

2.5

G

$37.53

 NIL

LPNT

Medical Services

Tenet Healthcare $70.00 (Mand.)

9.1

 PFD

G

$4.50

 NIL

THC 

Medical Services

Titan Int'l 5.625s2017         

2.5

 NMF

G

$20.88

0.1

TWI 

Car (OEM)

Health Mgmt 3.75s2028 (144A)   

3.5

3.1

H

$8.34

 NIL

HMA 

Medical Services

TRW Automotive 3.5s2015 (144A) 

2.6

 NMF

H

$32.33

 NIL

TRW 

Car (OEM)

Meritor (ArvinMeritor) 4s2027  

6.3

8.4

I

$5.21

 NIL

MTOR

Car (OEM)

Sonic Automotive 5s2029        

3.8

2.8

I

$14.35

 NIL

SAH 

Car (OEM)

* Prices as of 11/18/2011

 

Highlighted Convertibles:

Pioneer Natural Resources (PXD) explores, develops, and produces oil and natural gas, primarily in the United States (Texas, Colorado, and Alaska) and South Africa. In 2010, the company’s average daily production was 109,399 barrels of oil equivalent; 44% oil and natural gas liquid, and 56% natural gas. As of December 31, 2010, PXD had proved reserves of : oil/liquids; 565 MMBbl; natural gas, 2.7 Tcf.

So far this year, Pioneer Natural Resources has been enjoying favorable quarterly year-over-year comparisons. Thanks to increases of 38% and 39% in sales in the second and third quarters, respectively, the company realized a 27% rise in sales for the nine months ended September 30th. Meanwhile, share earnings rose dramatically to $2.96.

The convertible notes offer a safer alternative to the common, and enjoy a slight current yield advantage over the common.

Headquartered in South Africa, AngloGold Ashanti Limited (AU) is the largest gold producer in Africa, and the third largest in the world.  Its South African operations generated 39% of sales and 40% of operating profit in 2010. Operations in other parts of Africa contributed 33% and 28%, respectively); the Americas (20% and 30%); and Australia (8% and 2%). At the end of last year, reserves were 71 million ounces distributed as follows: South Africa, 49%; rest of Africa, 33%; Australia, 5%; South America, 7%; and North America, 6%. AU produced  4.5 million ounces of gold in 2010, while exploration cost was about $198 million.

The price of gold continues to soar as investors flee from the very volatile equity markets into gold bullion. Higher gold prices augur well for the company, and financial results indicate this. The latest quarterly results available (for the second period of the 2011 fiscal year) showed that for the first six months, sales rose 26.5% over the like period in the previous fiscal year. Share net soared more than 157%. However, the shares’ above-average volatility could deter some investors.

The 6% Mandatory Convertible Preferred Shares provides a less risky alternative for investors. The preferred —which is convertible through August 8, 2013— offers a significant current yield advantage over the common. Furthermore, if the company should find itself in a financial jam, common dividends would likely be discontinued. Meanwhile, the preferred issue offers considerable favorable exposure to the movements of the stock. In other words, the preferred will rise more than it would fall on equal up/down percentage moves in the underlying stock.

Titan International (TWI) is a leading manufacturer of wheels, tires, and assemblies for off-highway vehicles used in the agricultural, earthmoving/construction, and consumer markets in the United States. The earthmoving/construction market includes products supplied to the U.S. government, while the consumer market includes products for all-terrain vehicles and recreational/utility trailer applications. These products are manufactured to meet the demands of original equipment manufacturers (OEMs) and aftermarket customers.

Impressive quarterly results prompted our equity analyst to raise his year-end totals for this company.  The company posted record sales and earnings during the second quarter, while sales surpassed Value Line’s estimates for the third period. For the year, sales are projected to reach about $1.49 billion and earnings about $1.56 a share. Looking further out, the strong performance is expected to continue in 2012 as Titan raised prices on tires, and the benefits take shape from its acquisition Goodyear’s Latin American farm tire business.
The stock is not the safest, however. Its beta of 1.80 indicates high volatility, and earnings predictability is weak. A safer hedge for the common would be the company’s convertible notes due 2017.

By nature, the convertible is less volatile than its underlying common stock, and the income is more than the annual common dividends pay.


At the time of this article's writing, the author did not have positions in any of the companies mentioned.