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The Value Line Investment Survey ranks industries based on the amount of top-ranked stocks within each industry. These industries, as well as the stocks listed therein, are expected to outperform market averages in the next six to 12 months.

We believe the convertibles, whose underlying common stocks are listed in these top industries, represent a good starting point for investors seeking new convertible ideas.

The screen below is a partial list of convertibles issued by companies within The Value Line Investment Survey’s highest-ranked industries. The average premium over conversion value of all convertibles on the entire list is 49%; the average current yield, 2.4%; and the average yield to maturity, 4.0%. Most of these convertibles have some degree of call protection intact.

 

 

Recent

<------Convertible----->

 

Stock

Div'd

Com Tkr

Convertible Securities

Price*

Curr Yld(%)

Y-to-M(%)

Industry

Price*

Yld(%)

LCC 

US Airways Group 7s2020        

$100.92

6.9

7.0

AirTrn

$8.78

 NIL

FOE 

Ferro Corp 6.5s2013            

$100.05

6.5

6.6

ChemSp

$12.01

 NIL

ALSK 

Alaska Commun 5.75s2013 (144A) 

$98.05

5.9

6.7

TelSrv

$9.67

8.9

IPG 

Interpublic Group $52.50       

$921.29

5.7

 PFD

Advert

$9.57

 NIL

ORLY 

O'Reilly (CSK Auto) 4.63s25 Stp

$138.25

4.9

3.6

RetSpc

$51.08

 NIL

PLAB 

Photronics 5.5s2014            

$113.89

4.8

1.9

Semicn

$4.72

 NIL

ARM 

ArvinMeritor 4.625s2026        

$101.24

4.6

8.2

CarOEM

$14.10

 NIL

XLNX 

Xilinx 3.125s2037 (144A)       

$100.13

3.1

3.0

Semicn

$26.13

2.4

INTC 

Intel 2.95s2035                

$99.04

3.0

3.0

Semicn

$18.74

3.0

CRDN 

Ceradyne 2.875s2035            

$98.04

2.9

3.0

ChemSp

$24.47

 NIL

  * Prices as of September 14, 2010

 

Selected Convertibles Highlight:

Ceradyne, Inc. (CRDN) develops, manufactures, and markets advanced technical ceramics products, ceramic powders and components for defense, industrial, automotive and commercial applications. Its primary customers include the U.S. government, government contractors, and industrial manufacturers. The U.S. Military and defense contractors account for 66% of sales. The Costa Mesa, CA-based company employs about 2,039 people. Officers and directors own 6.6% of the common stock (including Chairman and CEO, J. Moskowitz, 5.6%); BlackRock, 8.8%; Royce & Associates, 8.8%, according to an April 2010 proxy. The Ceradyne 2.875% convertible note due 2035 is assigned our Highest rank (1) for best year-ahead performance, and its underlying stock is ranked 2 for above-average performance in the upcoming six to 12 months. That’s a winning combination. Quoted at 98.04 (on Sept. 14, 2010, with the stock priced at $24.47 a share), the convertible had a current yield of 2.9%, while the stock pays no dividend. Furthermore, the notes are callable on or after December 20, 2011 for a yield-to-call of approximately 14.5%. The notes are also putable on December 15, 2012, and the yield-to-put is 3.8%.

 

ArvinMeritor, Inc. (ARM) is a leading global manufacturer of automotive components serving truck and specialty equipment manufacturers. Its Commercial Truck segment accounted for 38% of 2009 total sales); the Industrial division, 22%; the Aftermarket & Trailer sector, (23%); and the Light-Vehicle Systems (LVS) division, 17%. The company was formed out of a merger between Arvin (which produced ride-control, emission, and filtration products) and Meritor (that manufactured drivelines, axles, brakes, roofs, window regulators) in July 2000. ArvinMeritor has two convertible debt issues outstanding, but only the 4% notes due 2027 are listed.  This convertible has a current yield of about 4.5%, while the stock pays no dividend. Its yield to maturity is about 5%, and the yield to put (on February 15, 2019) is 5.7%. With the notes trading with a 50% premium over conversion value, the convertible is expected to rise as much as 40% as the underlying common, and fall 48% if the stock declines.

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