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The Value Line Investment Survey reviews and ranks about 100 industries on a weekly basis, based on the average 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 momentum and earnings momentum. The stock rank also indicates 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 cull out “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

Common

Convertible Securities

Industry

Rec Prx

CurrYld(%)

YTM(%)

Prx

Yld(%)

TKR

Alaska Commun 6.25s2018 (144A) 

TelSrv

64.86

9.6

16.2

$2.26

8.8

ALSK

Tenet Healthcare $70.00 (Mand.)

Med Sv

$850.30

8.2

 PFD

$5.08

 NIL

THC 

Goodyear Tire/Rubber $2.94 Mand

CarOEM

$41.71

7.0

 PFD

$11.09

 NIL

GT  

Alaska Commun 5.75s2013 (144A) 

TelSrv

94.92

6.1

14.8

$2.26

8.8

ALSK

Sunrise Senior 5s2041 (144A)   

Med Sv

86.70

5.8

6.1

$7.23

 NIL

SRZ 

Meritor (ArvinMeritor) 4.625s2026

CarOEM

85.84

5.4

10.5

$5.18

 NIL

MTOR

Meritor (ArvinMeritor) 4s2027  

CarOEM

73.90

5.4

7.0

$5.18

 NIL

MTOR

Interpublic Group $52.50 B     

Advert

$1,038.73

5.1

 PFD

$10.85

2.2

IPG 

Hawaiian Holdings 5s2016       

AirTrn

109.42

4.6

2.3

$6.76

 NIL

HA  

Omnicare Capital Tr II $2.00 B 

DrugSt

$43.59

4.6

 PFD

$30.88

0.4

OCR 

* Prices as of July 6, 2012

Highlighted Convertibles:

Goodyear Tire (GT) is one of the largest tire manufacturers in the world, producing tires and rubber-related chemicals in 56 manufacturing facilities in 22 countries. Its tire brands include Goodyear, Dunlop, and Kelly. The company also operates commercial truck service and tire retreading centers, as well as more than 1,500 auto service locations. Foreign businesses accounted for 57% of sales in 2011.

The convertible preferred shares trade with a low 10% premium over conversion value, allowing for greater participation on the upside of the common.

Hawaiian Holdings (HA), through its subsidiary, Hawaiian Airlines, Inc., engages primarily in the scheduled air transportation of passengers and cargo. It provides scheduled air transportation and cargo amongst the Hawaiian Islands, between the Hawaiian Islands and various U.S. cities, the South Pacific, Australia, and Asia. Hawaiian also operates various charter flights. At the end of 2011, it had approximately 187 scheduled flights per day.

The convertible note makes an excellent alternative to the common, with its lower volatility and greater income.

Sunrise Senior Living, Inc. (SRZ) provides housing and 24-hour-a-day support services to the elderly. It offers a range of programs that are dependent upon residents' specific needs, including independent living, assisted living, and care for those with Alzheimer's disease. It also provides nursing and rehabilitative services. As of 12/31/11, the company operated 311 facilities throughout the United States, the United Kingdom, and Canada, with a total capacity of about 30,300 residents.

With a 5.8% current yield advantage over the underlying common and reduced volatility, this convertible note is suitable for portfolios seeking income and equity participation.


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