Looking Northeast for Yield

08/06/2004 12:00 am EST


Gerald Appel

Publisher, Systems & Forecasts

Each week, the newsletter division of Forbes , offers a "stock of the week" selection. In this case, editor Matt Schifrin, features a fund recommendation that comes from Dr. Marvin Appel, co-editor with his father Gerald Appel, of Systems and Forecasts.

"Dr. Marvin Appel recommends buying Northeast Investors Trust (NTHEX ), one of the oldest high-yield bond mutual funds. The $1.57 billion fund holds bonds, preferreds, dividend-paying common stocks, convertibles, and warrants - many below investment grade - and has an expense ratio of 0.65%. NTHEX currently yields 8.26% and has gained 5.79% year-to-date. The fund's net asset value was recently $7.54 per share. Two generations of the Monrad family have managed the fund since its inception in 1950. Appel's recommendation of Northeast Investors is based largely on technical analysis of total return history. ‘The past 48 months' return has averaged less than 5% per year, but is rising. Previous cycles have suggested that it has been relatively safe to buy when returns are on an upswing and at the current level,’ says Appel.

"Longer-term, NTHEX broke out of a trading range which mired the entire high-yield group from 1998-2002. Says Appel: ‘The implication is that if high yield cycles remain similar as they were in the past, Northeast Investors Trust could enjoy a prolonged period of attractive gains.’ Based on 40 years of price data, Appel notes that it has been 'more profitable and less risky to invest in NTHEX only when its 6-19 week MACD (of total return) has been positive, compared to buying and holding continuously. This favorable MACD condition is currently in place.' He also points out the series of higher lows in the MACD each year since 2001 - a sign of rising momentum.

"Default rates on corporate issues are on the decline, and NTHEX, although it is a high-yield fund, maintains a fairly conservative investment posture (under-weighting telecom debt) and keeps its maturities short. Appel assumes a stable outlook for interest rates through the end of the year in the wake of extreme oversold conditions in May. 'This fund, and high yield bond funds generally,' says Appel, 'appear to be in the accelerating phase of a long term profit cycle.'"

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