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On a weekly basis, The Value Line Investment Survey rates the expected relative performance of the approximately 1,700 common stocks in its database, and assigns a Timeliness Rank to each issue. Using a computer model, a Timeliness rank of 1 (Highest) is assigned to the 100 stocks that are expected to be the best performers relative to the other stocks in the Value Line universe over the next six to 12 months. The next 300 stocks are assigned an above-average rank of 2, and about 900 stocks get the rank of 3 for average expected performance. Of the bottom 400 stocks, 300 are assigned a below-average rank of 4, and 100 the lowest rank of 5. Like the Investment Survey with common stocks, the Value Line Convertibles Survey ranks convertibles for year-ahead performance, with convertibles expected to provide the best total return ranked 1, and those with the worst expectations ranked 5.

Convertible securities issued by companies whose stocks are highly rated by The Value Line Investment Survey tend to perform better than those whose stocks are on the bottom tiers. However, it is not uncommon to find highly ranked convertibles whose underlying common stocks are not expected to do well over the coming year. Usually, these convertibles are “busted,” with high conversion premiums that restrict the convertible’s participation in the upside activities of the stock, but also display solid downside protection, should the stock fall further. These convertibles generally provide a decent current yield advantage over the underlying common stocks, as the common stocks usually do not pay dividends. Moreover, these convertibles tend to hold their value as their investment values provide trading floors below which the convertibles should not trade.

We screened our database for convertibles ranked 1 or 2, whose underlying common stocks were ranked 4 or 5 by Value Line, and found 42. The average current yield of the group is 6.1% compared to 0.9% from all the common stocks. Even if we measured only the common stocks paying dividends, the average convertible in this group would generate a yield of 6.1% versus 3.6% from the underlying stocks. Below is a partial list of our findings.

 

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Conv

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

Convertible Securities

Price

Rank

Curr Yld(%)

YTM(%)

Gde

Industry

Price

Rank

Yld(%)

Horizon Lines 4.25s2012        

$83.02

2

5.1

14.3

G

TelEqp

$3.98

5

11.1

ProLogis 2.625s2038            

$91.46

1

2.9

3.1

D

REIT 

$10.15

4

5.9

ProLogis 3.25s2015              

$93.86

1

3.5

4.8

D

REIT 

$10.15

4

5.9

Washington REIT 3.875s2026     

$99.85

1

3.9

3.9

C

REIT 

$28.07

4

6.0

Stewart Enterpr 3.375s16 (144A)

$83.73

2

4.0

7.3

F

Mltyfm

$5.04

4

2.0

Steel Dynamics 5.125s2014      

$113.40

2

4.5

1.6

E

StlGen

$14.21

4

2.1

PrivateBancorp 3.625s2027      

$75.90

1

4.8

6.4

G

FinSvc

$10.94

5

0.4

Archer-Daniels $3.125 A        

    $37.32

1

8.4

 PFD

D

FdProc

$26.74

4

2.2

Wachovia Corp $75.00 Series L  

   $944.00

1

7.9

 PFD

D

Bank 

$26.24

5

0.8

Callaway Golf $7.50 B           

    $91.00

2

8.2

 PFD

F

Rec  

$5.99

4

0.7

AES Trust III $3.375           

    $45.00

1

7.5

 PFD

E

Power

$9.98

5

Nil

* Prices as of July 16, 2010

 

Selected Convertible Profiles:

ProLogis Trust (PLD) is a real estate investment trust that owns and manages a network of global distribution centers. ProLogis has about 475 million square feet in distribution facilities operating, and under development, in markets located throughout North America, Europe and parts of Asia. The company also offers warehousing and distribution solutions to industrial customers worldwide. Based in Denver, Colorado, the company employs approximately 1,135 in the United States and Europe. Because a REIT has to distribute most of its earnings to common shareholders to maintain the REIT status, the ProLogis Trust convertibles are trading at current yield disadvantages. However, investing in them can provide some downside protection, especially if the real estate markets weakens again. The 2.625% notes due in 2038 are putable on February 15, 2013 for a yield to put return of 6.0%.

Callaway Golf Company (ELY) is a leading designer, developer, manufacturer, and marketer of high-quality, premium-priced, innovative golf clubs and balls. Its key products, which include Big Bertha ERC II, Forged Titanium drivers, Big Bertha Hawkeye, and Stealhead X-14 irons, are oversized, incorporating the company's S2H2 design concept. Golf clubs accounted for 81% of net sales in 2008 and golf balls accounted for 19% of revenues. Foreign business accounted for 50% of sales. The company has about 2,300 employees. The convertible preferred shares are trading below liquidation value ($100.00) and yield 8.2%, while the common yields only 0.7%. In addition, with a 7% premium over conversion value, the shares are expected to rise 80% as much as the common and fall only 6% if the stock should suffer a decline. The shares are convertible until June 15, 2012.