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The Value Line Investment Survey reviews and ranks about 100 industries weekly, based on the average Timeliness rank of all stocks within an industry for that week. The assigned ranks indicate expected performance of the industry over the upcoming six to 12 months. The 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 and earnings momentum. The rank also indicates the individual stock’s expected price performance over the next six to 12 months.

Some investors prefer to focus on just the highest-ranked stocks 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. Often, such companies will benefit from the industry’s advance and often will be trading at a less expensive price point when compared to their more highly ranked brethren. BPZ Resources (BPZ), Molycorp (MCP), and Molina Heathcare (MOH) are examples of just such a situation (a quick overview of each company is provided after the table).

To help the convertible bargain hunters out there find some interesting names, we screened our convertible database to find convertibles from companies in top-ranked industries. We then took out convertibles issued by the highest-ranked companies. Below is a partial list of the convertibles whose underlying stocks is not highly ranked despite residing in a top-ranked industry.

Ticker

Convertible Securities

Price

Curr Yld(%)

Y-to-M(%)

Industry

Price

Yield(%)

BPZ 

BPZ Resources 6.5s2015         

93.01

7.0

9.2

PtrlPr

$2.87

 NIL

CIEN

Ciena Corp 4s2015 (144A)       

93.33

4.3

6.3

TelSrv

$10.71

 NIL

MCP 

Molycorp 3.25s2016 (144A)      

93.38

3.5

4.9

Mining

$31.94

 NIL

CRDN

Ceradyne 2.875s2035            

93.52

3.1

3.3

ChemSp

$28.63

 NIL

FVE 

Five Star Quality 3.75s2026    

94.00

4.0

4.3

Med Sv

$2.40

 NIL

GSS 

Golden Star Res 4s2012         

94.13

4.2

9.7

Mining

$1.79

 NIL

MOH 

Molina Healthcare 3.75s2014    

94.15

4.0

6.0

Med Sv

$14.86

 NIL

ALSK

Alaska Commun 6.25s2018 (144A) 

94.16

6.6

7.5

TelSrv

$6.07

14.2

LLL 

L-3 Comm Hldgs 3s2035          

94.60

3.2

3.3

Aerosp

$62.32

2.9

WMGI

Wright Medical Group 2.625s2014

94.60

2.8

4.5

Med Sv

$17.77

 NIL

 * Prices as of

<쐤н>October 4, 2011

 

Highlighted Convertibles:

BPZ Resources engages in the exploration, development, and production of oil and natural gas. The company has exclusive license contracts for oil and gas exploration and production covering approximately 2.4 million acres in four properties in northwest Peru. It also owns a minority working interest in a producing property in southwest Ecuador. BPZ Resources is currently executing the development of the Corvina oil discovery, the redevelopment of the Albacora oil field, and the exploration of Block XIX, in parallel with the execution of an integrated gas-to-power strategy, which includes generation and sale of electric power in Peru and the development of a regional gas marketing strategy. At December 31, 2010, the company had estimated net proved oil reserves of 38.9 MMBbls, of which 29.2 MMBbls were in the Corvina field and 9.7 MMBbls were from the Albacora field. Both fields are in Block Z-1 offshore of northwest Peru.

Although sales improved in the first half of the year, the company still did not realize a profit from operations. In fact, BPZ has been in the red since 2003 when The Value Line Investment Survey Small and MidCap Edition initiated coverage of the company.  At the same time, its financial position is below average. Investors willing to hang with this petroleum producing company may be better served with an investment in its 6.5% convertible notes due 2015.

Although the company’s big picture is blurred, the convertible notes have held up in value, trading only seven points below par, but close to investment value. The high coupon is a major draw to this security as long as the company is able to meet its interest payment obligation.

Molycorp is a rare earth oxide, or REO, producer in the Western Hemisphere. The Rare Earth Elements (REE) group includes 17 elements, namely the 15 lanthanide elements. The company's rare earth elements are critical inputs in many existing and emerging applications including: clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers, and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems; and advanced water treatment technology for use in industrial, military, and outdoor recreation applications. In September, Molycorp announced that it made a significant investment in Boulder Wind Power, which designed a rare earth-magnet powered wind turbine generator.

Molycorp reached profitability in the second quarter. For the first time in its history, MCP recorded its bottom line in black, a $0.52-a-share profit from record sales of $99.6 million. However, the stock’s volatility is about twice that of the market, which may deter most investors.

The way to ride with MCP is via its 3.25% convertible notes due 2016. The convertible notes are less volatile than the common, and investors are reasonably assured of interest payments on a timely basis. If interest is unpaid, investors could occupy seats on the Board of Directors of the company. The convertible offers a 3.5% current yield advantage over the common, and is favorably leveraged.

Molina Healthcare through its subsidiaries, operates as a multistate managed care organization. It delivers healthcare services to persons eligible for Medicaid, Medicare, and other government-sponsored programs for low-income families and individuals through a network of primary care clinics. The company also contracts with primary care physicians, specialist physicians, physician groups, hospitals, and other medical care providers. As of June 30th, it operated 14 primary care community clinics in California and two primary care community clinics in Washington; and managed three county-owned primary care clinics under a contract with Fairfax County, Virginia.

At the end of the first two quarters of 2011, MOH had sales totaling $2.29 billion, a 16.5% increase over the $1.97 billion garnered in the first half of 2010. Meanwhile, share earnings rose 36% to $0.75 a share, up from $0.55 in the same period a year earlier.

While the volatility inherent in the common is below the market average, its Safety rank is only average. That, plus middling scores for Price Stability and Earnings Predictability, makes the common a so-so bet for risk-averse investors. Molina’s 3.75% convertible notes due 2014 can eliminate much of that fear.

The convertible note offers a 4.0% current yield advantage and a 6.0% yield to maturity. It is not callable prior to maturity.


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