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Hating On A Bond For All The Wrong Reasons
This is Porter’s Daily Journal, a free e-letter from Porter & Co. that provides unfiltered insights on markets, the economy, and life to help readers become better investors. It includes weekday editions and two weekend editions… and is free to all subscribers.
Bonds are misunderstood… Shunned by non-distressed investors… Volatility plays a big role… Talen Energy’s merchant-power business… A 47% return in 12 months… Cooties on the playground… Bankruptcies are way, way up… S&P concentrations are staggering… |
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Editor’s note: Porter has turned today’s Journal over to Distressed Investing senior analyst Marty Fridson.
Marty has a long background in trading, investing, and finance… Over a 25-year span with Wall Street firms including Salomon Brothers, Morgan Stanley, and Merrill Lynch, he became known for his innovative work in credit analysis and investment strategy.
Below, Marty shares some of the wisdom learned along the way. He offers up a case study of a distressed bond that most investors had shunned and written off for the default pile…
Marty offers up the details now…
Bonds are severely misunderstood.
Most investors think of bonds as unspectacular but steady performers whose role is to stabilize a portfolio that also contains the higher-octane asset class of common stocks. But subscribers to our Distressed Investing research know there’s another side to the story. They’ve seen returns like the following on some of our past recommendations:
AMC Entertainment 5.75% bond maturing 6/15/2025: 42.64%
Frontier Communications bond 5.875% maturing 11/1/2029: 43.87%
Herbalife 4.25% bond maturing 6/15/2028: 35.32%
Stratospheric returns like those result partly from yields much higher than you see on the safe, secure bonds of investment-grade companies (rated BBB or higher). But it takes heroic capital gains to achieve percentage returns in the 30% and 40% range.
This is a different world from a stock that jumps 3% when quarterly earnings come in 10 cents higher than the analysts’ consensus. Rather than gauging the odds of the next quarter’s earnings per share exceeding guidance by a couple of percentage points, distressed investors often have to make a judgment on whether a company will default on the next coupon payment.
That event could be followed by a bankruptcy filing in which holders would recover less than half the face value of their bonds. In short, distressed investing is a high-stakes affair, but for that very reason the payoffs for being right can be phenomenal.