Bonds Part I: High Yield Favorites

07/25/2003 12:00 am EST

Focus:

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Marilyn Cohen, columnist for Forbes warns that the fun-up in high yield bonds is overdone. Nevertheless, she still sees opportunity in select issues. Meanwhile, in his column in CBSMarketWatch.com, Thom Calandra highlights a money manager's all-weather portfolio, comprised of high yield bond funds.

"Like dot-com stocks in 1999, high-yield bonds are priced for perfection," says Marilyn Cohen, author of The Bond Bible and columnist for Forbes magazine. "If you have a big chunk of your portfolio in junk bond funds, take some profits. That's not to say, however, that all junk is bad. One place to look is among companies that have already been through the fire. They have endured financial distress and made changes to their businesses and/or balance sheets. One is Rite Aid, which harbors a sordid past. But that history changed in 1999 with new management. During the company's turnaround Rite Aid paid down debt, remodeled stores, freshened inventories, and increased pharmacy sales. I like the 7.125s due Jan. 15, 2007, trading at 99 for a 7.45% yield to maturity.Imax Theaters is considerably dicier than Rite Aid, but you get a yield commensurate with the risk. The 7.875s due Dec. 1, 2005 trade at 98 for an 8.8% yield to maturity. The gigantic screen theater company is now showing blockbuster Matrix Reloaded, with Matrix Revolution coming in the fall. This is the first time mainstream live-action films can be viewed in Imax format, thereby reaching a mass-market audience. Considerably safer is J.C. Penney, a retail turnaround story. The 6s due May 1, 2006 trade at par for a 6% yield to maturity. The latest 12-month earnings of $1.68 billion before interest and taxes covered interest expense 4.3 times."

"One fund manager sees high-yield corporate bonds, debt-for-equity swaps and other convertible securities as the mainstay of a portfolio that will weather rocky spans," says Thom Calandra, columnist for CBSMarketWatch.com. "Anthony Gambacorta - the chief investment officer of $150 million Preswick Capital Management - sees high yielding corporate bonds, and the mutual funds that specialize in them, as good bets in an uncertain market environment. To be sure, many mutual funds that specialize in high yield corporate debt, such have had a rally of 25% or more since their low points of October 2002. but I think we are only in the third or fourth inning with these bonds that have growth kickers,' he says. Gambacorta's all-weather portfolio includes 10% or 15% allocations to such bond funds as Fidelity Advisor High Income Advantage Fund Class C (FAHEX), T. Rowe Price High Yield Fund (PRHYX), and PIMCO High Yield Fund Class D (PHYDX). Another holding is the Pioneer High Yield Fund Class C (PYICX), which specializes in so-called 'busted convertibles,' a class of bonds that could allow holders access to very cheap converted equity in troubled companies. 'Don't let the name fool you, this fund has over 60% of its assets in convertibles, with the balance allocated to high yield bonds,' says Gambacorta."

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