Commentaries

Value Line’s All Convertibles Total Return Index up 4.7% in the Third Quarter; 13.3% in Nine Months

Orly Seidman — Thu, 25 Oct 2012 20:01:25 GMT

Stocks performed solidly in the third quarter, as the Federal Reserve announced more stimulus measures for the U.S. economy, and efforts to ease the crisis in the euro zone were stepped up. The uptick in stocks augured well for convertibles. Premiums over conversion value shrank somewhat, allowing for greater participation in the advances of the underlying common stocks.

Value Line’s All Convertibles Total Return Index Was Down 0.6% in Second Quarter, But Up 8.2% for the First Half of the Year

Orly Seidman — Tue, 31 Jul 2012 14:35:59 GMT

Equity losses among convertibles were cushioned by interest or dividend income and investment value. The Value Line Convertibles Survey All Convertibles Total Return Index lost 0.6%, while the Recommended Convertibles, as a group, suffered a 4.1% drop.

Especially Recommended Convertibles Up 8.6% in First Quarter 2012

Richard Gallagher — Thu, 10 May 2012 16:28:48 GMT

The exodus of capital from safer investments into more-risky global assets curtailed the value of convertibles in the first quarter. While some lower-volatility convertibles had good performances, stocks underlying our recommended convertibles outpaced the debt issues 18% to 8.6%.

Convertibles Underperfomed in 2011

Marigo Rizzo — Mon, 02 Apr 2012 19:30:06 GMT

Despite the uncertainties of global economic conditions last year—a downgrade in the U.S. credit rating, political gridlock in Washington, Europe’s unending debt crisis, as well as declining home prices, and higher oil quotations--the Dow Jones Industrial Average managed to end the year up 5.6%, thanks to a 12% increase in the fourth quarter.

Recommendations of the Week - August 12, 2011

Richard Gallagher — Thu, 18 Aug 2011 15:30:39 GMT

With most equity markets in a state of flux, investors are seeking safer havens, buying up corporate bonds and government securities. Some investors have found buying opportunities among downtrodden securities, convertibles included.

Warrant Hedging: A Timely Strategy

Richard Gallagher — Thu, 28 Jul 2011 18:57:22 GMT

The exceptional leverage provided by warrants makes them ideal candidates for hedging. A warrant hedge consists of a long position in a warrant and a short position in the underlying common stock.

Long-Term Value Investors May Want to Take a Closer Look at Warrants

Matthew Spencer — Mon, 20 Jun 2011 19:25:14 GMT

One of the issues common-stock investors face when waiting for a downtrodden issue to rebound is that their capital is tied up and unavailable for other, possibly more productive, uses. However, financial instruments, such as warrants, can help mitigate this problem. Indeed, they may be a good option for long-term investors that are bullish on battered stocks or sectors, such as financials.

ERI Convertibles Up 6.9% in First Quarter 2011

Richard Gallagher — Fri, 15 Apr 2011 19:02:49 GMT

Our recommended convertibles posted a 6.9% gain for the first quarter of 2011, beating most major indicies.

Greatbatch Convertible Offers Income and Safety

Richard Gallagher — Wed, 30 Mar 2011 20:26:44 GMT

Greatbatch, Inc. (GB), the pioneer in pacemaker devices is an interesting investment in the healthcare/medical devices sector, as medical practitioners implant these devices almost on a daily basis. But because failure in any of these devices can send shock waves throughout the industry, investors can avoid volatility by investing in Greatbatch’s 2.25% convertible notes due 2013.

Value Line Convertibles Survey -- Current Recommendations (March 10, 2011)

Richard Gallagher — Wed, 16 Mar 2011 18:13:13 GMT

The volatile equity markets have caused investors to again rethink their investment strategies. As the markets gyrate, investors often run to seek safer havens for their investment dollars. One area that affords income, safety, and participation in the equity markets, all at once, is convertible securities. This week our recommendations include Buy, Sell, and Hold advice about convertibles issued by Orbital Sciences Corp.,Archer-Daniels-Midland Company, Mentor Graphics Corp., and NuVasive, Inc.

This Week's Recommendations - March 3, 2011

Richard Gallagher — Tue, 08 Mar 2011 19:18:08 GMT

As a group, Value Line’s recommended convertibles gained 2.5% on a total return basis in February, while the stocks underlying them, as a group, rose 4.4%. Recommended Rank 1 convertibles rose 3% for the month, and 5.9% for the first two months, which beat all major equity indices. This week we have seven trade recommendations.

Investment Opportunities Among Unranked Convertible Bonds

Richard Gallagher — Fri, 25 Feb 2011 16:31:37 GMT

The Value Line Convertibles Survey assigns a Performance Rank to convertibles in our database whose underlying common stock is ranked for Timeliness/Performance in one of its sister publications, The Value Investment Survey or The Value Investment Survey Small and Mid-Cap Edition. Not all the convertibles in our database are ranked, though. Of the 622 convertible bonds and preferred stocks currently in our Survey, 131 (or about 21%) are unranked. Unranked convertibles are not considered for inclusion on our Especially Recommended list. However, the absence of a rank does not necessarily mean that a convertible is a bad investment.

SunPower Convertible Debt, an Alternative to the Common

Richard Gallagher — Thu, 17 Feb 2011 16:21:06 GMT

Rising crude oil prices continue to drive global economies to seek alternative energy sources, and investors are being drawn toward these stocks in recent times. One such stock is SunPower Corporation (SPWRA), a developer and manufacturer of solar-electric products. After a setback in 2009, when the stock price plunged from a high $134 in 2008 to $46 in 2009, the company seems to be on the road to recovery. Because of the inherent risk, however, long-term investors should consider the company’s 4.75% senior convertible notes that mature in 2014.

Ford Calls Convertible Securities; Wright Medical Group Begins Tender Offer

Richard Gallagher — Tue, 15 Feb 2011 18:14:31 GMT

With the earnings season almost behind us, companies are aggressively seeking ways to improve their balance sheets. Ford Motor Company (F) continues to reduce its debt level with the redemption of two convertible securities. Meanwhile, Wright Medical Group (WMGI) began a tender offer to buy back any and all of its 2.625% convertible senior notes for cash.

Fourth-Quarter and Full-Year Results

Richard Gallagher — Wed, 12 Jan 2011 21:15:37 GMT

Although convertibles tend to lag their underlying stocks in an upbeat market, that was not the case in 2010. In fact, convertibles in our universe outperformed all major indexes except one, the NASDAQ Composite.

MasTec's Convertible Debt Issues

Richard Gallagher — Thu, 06 Jan 2011 20:53:01 GMT

MasTec operates in the Heavy Construction Industry, a group of companies that provide a wide range of engineering, planning, design, consulting, construction, and construction management services for governments and the private sector. The prospects for this industry are bright, considering the recent turnaround it has made after being in the doldrums during 2008 and 2009, and the early part of 2010. Things have changed, however, and the recently completed third quarter showed vast improvement in profitability. MasTec has two outstanding convertible debt issues. Do these issues offer investors another way to capitalize on MasTec's turnaround?

Commonly Asked Questions about Convertibles

Richard Gallagher — Thu, 23 Dec 2010 18:40:02 GMT

New investors in convertible security may not understand the complexity of this asset class and become frustrated. We provide answers to some of the most commonly asked questions and hope new investors will better understand convertibles.

Timely Convertibles with Timely Stocks in Timely Industries

Richard Gallagher — Tue, 23 Nov 2010 15:31:43 GMT

This screen is a partial list of convertibles with above-average total return potential whose underlying common stocks are ranked for above-average year-ahead performance and reside in industries with above-average Timeliness ranks as well.

The Convertible Advantage

Richard Gallagher — Mon, 01 Nov 2010 19:19:49 GMT

Some convertibles offer very limited downside risk in regard to its underlying common stock activities, while providing relatively high yields. And chances are that if the underlying stock rises significantly, there is the potential for worthwhile price appreciation in the convertible.

Value Line Convertibles Survey’s Third Quarter Performance

Richard Gallagher — Mon, 11 Oct 2010 18:45:21 GMT

Convertibles turned in a remarkable performance in the latest quarter, which ended October 1st. Our All Convertibles Total Return Index gained 5.0% for the month of September, and 7.9% for the quarter, bringing the year-to-date figure to 10.2%. Our Especially Recommended portfolio rose 4.5% for the month, 8.1% for the quarter, and 11.2% year to date.

Short Maturity Convertibles

Ian Gendler — Fri, 10 Sep 2010 12:29:32 GMT

Shorter maturity bonds, those due to mature in less than five years, have advantages. In fact, they can be very attractive additions to a convertible portfolio. The clearest benefit is a relative insensitivity to moves in interest rates, while still offering relatively high yields.

Gilead Convertible Debt Sale

Richard Gallagher — Wed, 28 Jul 2010 20:31:41 GMT

The convertible new issues market got a needed “shot in the arm” from Gilead Sciences’ (GILD) $2.2 billion of convertible debt, the biggest sale since Ford Motor Company (F) sold $2.5 billion of 4.25% convertible debt due 2016 in November 2009. On July 27, 2010, Gilead issued $1.1 billion aggregate principal amount of 1.00% convertible senior notes due 2014 and $1.1 billion aggregate principal amount of 1.625% convertible senior notes due 2016 to qualified institutional buyers (QIBs) under SEC Rule 144A of the Securities Act of 1933.

Value Line’s Convertible Indexes and Market Prolfiles

Richard Gallagher — Mon, 26 Jul 2010 15:26:00 GMT

The Value Line Convertible Indexes have long been used as benchmarks of convertible market performance. But these indexes are only part of the convertible market data that we compile and make available to subscribers. Our Convertible Market Profile provides important additional information about the convertibles market and how convertibles perform as an asset class.

Especially Recommended Convertibles Still in Positive Territory

Richard Gallagher — Wed, 07 Jul 2010 20:46:37 GMT

Expectations for an improved domestic economy in the second quarter only materialized partially. Indeed, things seemed to be slowing again as the period ended after the initial burst. Our Especially Recommended Convertibles Index fell 1.3% in the second quarter, but it too remained positive for the year, up 2.7%. Our performance results underscore the defensive nature of our portfolio. While past results are no assurance of future performance, Value Line's Convertible Ranking System has proven effective over the years.

Microsoft's New Convertible Debt Issue

Richard Gallagher — Wed, 28 Jul 2010 20:34:38 GMT

Microsoft’s (MSFT) sale of convertible notes could add some energy to the otherwise lackluster convertibles market. Around June 9, 2010, the company raised $1.25 billion of interest-free financing from its first sale of convertible notes in years.

Cadence Design Systems New Convertible Senior Notes due 2015

Matthew Spencer — Thu, 31 Jan 2013 14:28:04 GMT

Cadence Design Systems (CDNS) recently priced an offering of $300 million principal amount of cash convertible senior notes due 2015.

The Merger Between Biovail and Valeant

Matthew Spencer — Wed, 23 Jun 2010 20:48:50 GMT

Bioval Corp. (BVF), Canada’s largest publicly traded drugmaker, and Valeant Pharmaceuticals Int’l (VRX) are coming together to form one company. The two decided to merge in a cash-and-stock deal, and the new company will be called Valeant Pharmaceuticals International, Inc. Both companies have outstanding convertible debt issues.

Current Yield Advantage: Choosing Between the Common and the Convertible

Matthew Spencer — Thu, 17 Jun 2010 13:27:09 GMT

Yield advantage is the extra amount of return an investor would earn if he/she buys a convertible security in lieu of the common stock issued by the same company. That is to say, if the convertible yields 5% and the common stock yields 2.3%, the yield advantage would be almost three percentage points. Typically, almost all convertible securities are issued at a yield advantage over the underlying stock. This is one of the first things investors tend to look at when determining the relative attractiveness of a convertible over its underlying common stock. Usually, the yield advantage offered by a convertible will continue over its life, but there are situations when that yield advantage may contract or even disappear.

The Telvent Convertible Debt Issue

Jeanne McLaughlin — Fri, 23 Apr 2010 15:58:57 GMT

On April 7, 2010, Telvent, a global IT solutions and business information services provider, priced an offering of $175 million aggregate principal amount of 5.5% Senior Subordinated Convertibles Notes due 2015. The notes were sold in a private placement to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1993, as amended. What that means is buyers are aware the debt issue is not registered with the SEC at the time of purchase and the rules governing such debt may or may not be modified by the SEC. The company has also granted the initial purchasers a 30-day option to purchase up to an additional $25 million aggregate principal amount of the notes. The offering is set to close on April 19, 2010, subject to customary regulations.

Convertible Market Watch (1st Quarter 2010)

Jeanne McLaughlin — Fri, 23 Apr 2010 15:52:13 GMT

The first quarter of 2010 was a volatile one, with an early year sell off followed by another run toward Dow 11,000. As usual, news filled the air, with such notable events as Ben Bernanke being reconfirmed as Chairman of the Federal Reserve, ongoing discussion of increased government regulation of the financial markets, the health care bill debate come the bill’s eventual passage, and disquiet surrounding the prospects for select European economies (most notably Greece) all flirting with center stage for investor attention.

Blockbuster in Bankruptcy?

Jeanne McLaughlin — Thu, 22 Apr 2010 20:38:42 GMT

Blockbuster, a long-established video rental company, indicated in a recent SEC filing that it may be close to filing for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code. The company’s indebtedness totals about $1 billion. As a result, one ratings agency has already downgraded Blockbuster’s creditworthiness.

The Millipore-Merck KGaA Merger’s Impact

Jeanne McLaughlin — Thu, 11 Mar 2010 20:26:02 GMT

Millipore (MIL) has agreed to be acquired by Germany's Merck KGaA for $107 per share in cash. The agreement has had a big impact on Millipore’s stock and its convertible bond.

Understanding Convertibles Made Easy

Matthew Cottell — Mon, 28 Jan 2013 19:30:03 GMT

In an economic environment where stocks are advancing, investors turn to stocks because of quick returns. However, volatility plays a vital part in how long these gains can be sustained. When there is a downturn in the equity markets, like we have been experiencing, investors seek to find safer investments such as bonds and other more stable instruments. Indeed, the diversity and hedge capabilities of convertibles offer investors a veritable plethora of opportunities to tailor a portfolio to meet their specific goals. Still, many investors do not include convertibles to their portfolios fearing the intricacies of convertible securities are beyond their level of market sophistication. Nevertheless, the basic principles and terms of convertibles are as easy to understand as the key concepts of “straight” (non-convertible) bonds and stocks. Even the more advanced concepts of convertible trading can easily be learned. To be sure, some of the concepts we outline in this article may seem complicated, and in most cases, a basic understanding is all that’s necessary as our model calculates and determines many of these values for each convertible in our survey.

Performance of Especially Recommended Convertibles in Fourth Quarter and 2007

Richard Gallagher — Mon, 09 Aug 2010 19:50:29 GMT

The housing market, higher oil prices, and the mire in which financial companies have been plunged as a result of the subprime mortgage mess took their toll on the economy in the final quarter of 2007. All major equity indexes suffered losses in the period. The Dow Jones Industrial Average was down 3.8%, the S & P 500 declined 3.2%, the Russell 2000 decreased 4.2%, and the Nasdaq Composite fell 1.0%. This resulted in a flight to safety as investors searched for guaranteed income with far less exposure to risk.

When Convertibles Become Difficult to Trade

Matthew Cottell — Mon, 28 Jan 2013 19:44:40 GMT

In general, issues we deem to be illiquid (having a liquidity grade below 3) are usually convertibles with an outstanding dollar amount of less than $50 million. These issues normally command wide bid/ask spreads that make it difficult for investors to trade and realize the total returns that can be achieved on liquid convertibles. As a result, we recommend investors only focus on our Especially Recommended liquid issues, found on the third page of this section each week, and note that the illiquid issues that can be found on this list are at the request of subscribers and we do not include them in our performance calculations.

Buying Convertibles on Margin

Matthew Cottell — Mon, 28 Jan 2013 19:13:34 GMT

The strategy of buying securities on margin allows investors to leverage a position by obtaining an interest-bearing loan from a broker in order to purchase a greater dollar amount of securities. Using margin to leverage a position, however, increases the risk of the position. If a margined position moves as expected, the owner will generally receive a higher total return than on a position that is purchased outright. On the other hand, a greater loss can be expected if the market moves against the owner’s position.

Understanding Theoretical Investment Values

Matthew Cottell — Mon, 28 Jan 2013 19:38:24 GMT

With the equity markets behaving in a more volatile manner than usual, particularly on the downside, convertibles have gained in popularity of late. More than ever, investors are looking for securities with some price stability; more protection from the downward spiral in the equity markets. Focusing on convertibles trading with smaller, if any, premiums over investment value and large premiums over conversion value, may provide some solace for investors who are bold enough to investy in these choppy seas. Convertible securities that fit this premium profile are called “busted” convertibles, and will usually offer much higher current yield than the average convertible, along with yields to maturity that compare favorably to non-convertible bonds. In theory, a convertible trading on its investment value tends to be insensitive to movements in the underlying common stock. However, does this perception hold up on the trading floor? This week we will discuss investment value and our views of just how much downside protection can be expected. But let’s first review briefly some fundamental convertible relationships.

The Flexibility of Convertibles Securities

Richard Gallagher — Mon, 26 Jul 2010 19:06:34 GMT

The diversity and hedge capabilities of convertibles offer investors opportunities to tailor a portfolio to meet their specific goals. Many investors often brush aside convertibles, because of their complexity. Nevertheless, the basic principles and terms are as easy to understand as the key concepts of “straight” (nonconvertible) stocks and bonds, and even the more advanced concepts of convertible trading can easily be learned. Though some of the following concepts may seem complicated, a basic understanding is all that’s necessary in most cases, because our model calculates and determines many of the values for each convertible listed in our survey.

2008 Fourth-Quarter and Full-Year Performance Results of Especially Recommended Convertibles

Richard Gallagher — Fri, 15 Mar 2013 13:39:24 GMT

The year 2008 is finally behind us. It is now time to regroup and rebalance portfolios as we move into 2009, trying to regain some of the losses incurred in 2008. All the major equity indexes were down considerably last year, as if we needed a reminder. The Dow Jones Industrial Average lost about 34%, the S&P 500 Index was down 38%, the NASDAQ Composite fell 24%, and the Russell 2000 Index dropped 35%. Value Line’s All Convertibles Total Return Index fell 28.8%. As resilient as convertibles have historically been, they too suffered badly as stocks decreased by unprecedented amounts. At this point, many investors are wondering how they can capitalize on the current economic trough with a profitable strategy involving convertibles. This concern, however, will be discussed at length in a future narrative.

Convertibles as an Asset Class

Matthew Cottell — Mon, 28 Jan 2013 19:17:52 GMT

Investors, searching for safer havens, are pulling out of stocks and investing in bonds and government securities. Indeed, the Dow Jones Bond Average gained 0.8% in January, while our All Convertibles Total Return Index grew 1.8%. Even the government is considering the option of buying “convertible securities from financial institutions,” with bailout money (according to an article in the January 21st Wall Street Journal). Because of their hybrid nature, convertibles could be the ideal investment for investors “hooked” on stocks, as we go through this recession. A convertible has an investment value (a bond value); it pays income, which is generally higher than that of the stock; and the warrant portion gives holders a call option on the underlying stock when equity markets perk up again. And, they are more stable than stocks.

The Flexibility of Convertibles

Richard Gallagher — Mon, 26 Jul 2010 19:02:46 GMT

The uncertainty in global markets has investors in a quandary. The economic instability has many scratching their heads wondering when things will bottom out. Investors are desperately seeking safer havens for their dollars causing a flight to government-backed securities. But many overlook the fact that investing in convertible securities, which are defensive by nature, can provide some golden opportunities. Many investors often brush aside convertibles because of their purported complexity. However, the basic principles and terms are as easy to understand as the key concepts of “straight” (non-convertible) stocks and bonds, and even the more advanced concepts of convertible trading can easily be learned. So much so that convertibles can be tailored meet the specific goals of a portfolio. Below are some of the concepts surrounding convertible investing. Though some may seem complicated, a basic understanding is all that’s necessary because our model calculates and determines many of the values for each convertible listed in our survey.

Evaluating Convertibles the Value Line Way

Matthew Cottell — Mon, 28 Jan 2013 19:23:12 GMT

If you are new to convertible investing, then this article is for you. What is a convertible security, you ask? A convertible security consists of two components: a “straight” non-convertible debt instrument (bond or preferred stock) and a long-term warrant on its underlying common stock. Corporations issue convertible securities for the same reason that any other security is issued: to raise capital. The big advantage of issuing a convertible security is that it is cheaper to finance. The debt is usually sold with a lower coupon than that on non-convertible, or “straight,” issues with comparable maturities.