In an era where everyone is chasing yield, corporate bonds are a great place to look for safety and total return, observes Chris Heffernan of SumRidge Partners.
Gregg Early: I'm here with Chris Heffernan, Director of Sales at SumRidge Partners. Chris, there continues to be a hunt for yield out there with pretty much everyone, including individual investors and pension funds and virtually everyone else.
You've been researching some of the fixed-income securities that are still left that have some decent yields and have yet to been bid up to the sky. Could you talk about some of your research and what you've discovered?
Chris Heffeman: Sure. As you mentioned, people all across the world are looking for any kind of incremental yield they can find. And 2012, much like the last few years, has been extremely positive for risk assets.
With that being said, the credit markets throughout 2012 are up anywhere from 10% to 15% on average between investment-grade and high-yield corporate bonds. Yields are at all-time lows, and dollar prices are at all time highs; plus there are certain pockets of the fixed-income markets where you can still get 6% to 10%.
Now, in a normalized world, years and years ago, these types of securities would probably have yielded 200 to 300 basis points more than they are yielding right now. But again, with the world that we're living in, there are certain names that are yielding 6%, 8%, 10%, 12%.
Some of the coal and steel names are yielding 8% to 10% or higher. There's certain BBB investment-grade credits, such as the Telecom Italias (TI) and Telefonicas (TEF) of the world, the telecommunication companies over in Europe, that have strong balance sheets, but again are kind of caught up in the mess of the European headlines. They're yielding north of 7%.
Also, the steel names that I mentioned, like ArcelorMittal (MT)-the largest steelmaker in the world, yielding about 8% right now-and the retailers. Most people are familiar with JCPenney (JCP), and JCPenney debt yields 8%.
So, if you're familiar with the company or an industry-every company has its positives and negatives-and you're positive on the stocks, certainly anything in the bond world that's yielding 6%, 8%, 10%, 12%, you might want to take a look at as well.
Gregg Early: Those are significant yields, especially when a lot of people are still looking at stocks and finding 4% or 5% yields, and Treasuries are no place to go.
|pagebreak|Now, as far as some of the companies that you're talking about, it sounds like you're talking about some beat-up sectors and regions. Are these long-term plays? Do you see these as sort of total return plays, or are these just to capture the yield for a few quarters or a year or so and then move out once they start to correct?
Chris Heffeman: It depends on the name, obviously, but I'll give you an example. Advanced Micro Devices (AMD) had poor earnings out about two or three weeks ago, and the bonds are down about 20 points. I put out a report a couple weeks ago called Reaching for Yield, and AMD was included in it.
That's one opportunity where if you're comfortable with the name and the sector and you're looking for some kind of turnaround play while the rest of the markets are moving higher, that's one example where you know the bonds are down significantly. And if you make the right call, it can be a total return play.
And there are plenty of ideas again in the coal space; they've gotten beat up pretty good. Steel, anything commodity-related. If you see any kind of turn in China, if NatGas continues to increase, some of these other pockets certainly can offer total return plays, as well as just your state of the yields to maturities that you're looking to achieve.
Gregg Early: Right. And I guess the steel sector, for
example, that's just essentially an economic play. Once growth starts again,
then you're looking at people starting to use steel again. But it's down now and
you can take advantage of that probably better on the fixed income side at this
point, at least from the standpoint of being more of a stakeholder in the
company than you would if you were just an equity holder.
Chris
Heffeman: Absolutely. I had mentioned earlier MT bonds are yielding 8%
on the long end of the curve. You have AK Steel (AKS)
bonds and United States Steel (X)
bonds, more domestic oriented, that are yielding upper single digits, lower
double digits.
There are opportunities, and what we do here at SumRidge Partners is we try to combine ideas for every type of account. A lot of the accounts here that are looking for just generic, "give me relative value ideas versus the rest of the sector. I don't need to make a ton of money on a total return play, but just give me something that looks cheap and give me the reasons why," as well as total return plays.
What's been hit very hard? Where can I achieve equity-like returns where you're capturing principal appreciation as well as the income that you're getting for single, upper single-digit, double-digit type returns that I was used to for so many years, when equities were rising significantly and when yields in fixed income were much higher? That's what we try to do here.
Look at the report: there are 25 opportunities in there that I mentioned. If you're familiar with the company or the industry and you're bullish on it, or you think at least rates are going to stay low for years and risk is low because they're being held up by the central banks around the world, there are certainly some opportunities out there for you.
Related Reading:
Corporate Bonds: A Safe Haven?
