Best Bond Bets

02/25/2005 12:00 am EST

Focus:

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Bond expert Marilyn Cohen has a unique ability to convert the highly complex world of bond investing into easily understood terms for individual investors. Here, the columnist for Forbes and president of Envision Capital discusses her favorite bond opportunities.

"I would like to discuss some of my favorite bond picks. Any or all of these bonds picks will serve you very well. Bond people aren’t like stock people. Stock pickers have good ideas all the time. Good bond managers have a few good ideas every year, and that’s about it. We try to come up with a few gems every year. I’d also note that while I’m not a stock picker, some of my bond picks might turn out to be good stock picks as well.

"My first selection is one that I have bought for clients and bought for myself. SLM Corp. (SLM NYSE), which is the old Sallie Mae, with just a new name. They have issued bonds that are called structured notes. Our recommendation is for the SLM Cprp. 4% due 7/25/14 (CUSIP 78442FCT3). These bonds are based on a derivative component. You are given a minimum coupon of 4% that is guaranteed, as long as Sallie Mae stays in business, which I think is an excellent assumption. And if interest rates move up, you will move up with them. You will always get 80% of the current constant maturing Treasury. So five years from now, if interest rates are at 8% on ten-year Treasuries, you will earn 80% of that 8% yield. In plain English, this makes good investment sense to buy something like this. There are $190 million in these structured notes outstanding. It’s A rated and you can watch the stock. I like the fact that even though ten-year Treasuries are yielding 4.14%, I have a floor at 4% and every year that goes on and the maturity gets shorter and shorter, I have the potential to make a higher rate of return, which isn’t true with most fixed income securities. I like that component.

"My absolute favorite is an issue from Wyeth (WYE NYSE). The bond I recommend is the Wyeth step up coupon 5.5% due 2/1/14 (CUSIP 983024AE0). The yield is not as enticing as it was a year ago, because they are getting their act together. You know the problems with WyethFen-Phen litigation. They continue to make timely interest payments on their debt. They continue to make their dividend payments. And unlike their competitors, such as Merck or Pfizer, they are firing on all cylinders. All of their businesses are doing fantastically well. Unlike their competitors, they have very few drugs going off patent in the next few years, and they have a full pipeline of new drugs that are going to be out on the market between now and 2008. I think that’s great. But there’s still this black cloud over them due to litigation. In fact, this might even be one of those cases, where you might end up making more money on the stock than the bond. The bondcurrently around $110-115is yielding 4.89%. I’m very comfortable with the bonds, and the stock also has good potential.

"Interpublic Group (IPG NYSE) is another one I like. This is a diamond in the rough. It used to be a fantastic company, but they have had all kinds of bumbles and problems with management and integration of acquisitions. They have made every mistake in the book that a big ad agency could make. Why am I recommending it? It’s certainly not for the faint of heart, but I think that if they finally turn their business around, then the Interpublic 6.25% due 11/15/14 (CUSIP 460690AV2) is a great deal. It’s trading right around par. So the yield is 6.25% at the worst, to maturity. It think that if they get the job done and get the new management to better manage the company, I think these bonds will grow to a premium and you will be very happy that you locked in 61/4%. I have bought them for clients, and I have bought them for myself. I do have my finger on the trigger to make sure that new management won’t make the same mistakes as previous management. But I think it’s a turnaround situation. It’s an aggressive recommendation, but I think you’ll be paid handsomely.
 
"Leucadia National (LUK NYSE) is often called the little Berkshire Hathaway. Two really, really smart guys have been running the company since it started. Like Buffett, they are value investors. They buy companies and keep the people who ran those companies in place. It’s a mini-conglomerate, with wineries, insurance, property & casualty, etc. They have done outstandingly well. However, it is not a company that Wall Street follows. I’ve bought the Leucadia 7% due 8/1/5/13 (CUSIP 527288AS3) when they were below par, locking in a better than 7% yield. For new clients, I still buy them. They now have about a 6.4% yield. It’s now trading around $102-$103. The company doesn’t have a lot of debt out. They are very smart operators. They’ve never let us down. And when interest rates move up, these bonds stay rock solid. I think these bonds are a great buy."

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