2 Underdogs Worth Supporting

06/15/2012 10:30 am EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Just because companies are hit with bad news isn't the time to run away...sometimes it's a good time to step in and buy, observes Marilyn Cohen in Bond Smart Investor.

It's not exactly a whisper. Nor is it a murmur. Sotto voce is an undertone, said under your breath so as not to be overheard.

Here’s my sotto voce: Yes, JCPenney (JCP) quarterly results were ghastly. Yes, sales and comp-store sales numbers wanted to make me wretch. But turnarounds are painful and slow. From the looks of it, neither the JCP equity nor bondholders have patience or leniency.

When we recommended Macy’s bonds years ago as a major turnaround story, it didn’t happen when the new CEO announced his makeover plan. Maybe Ron Johnson, Penney’s new CEO, won’t be successful.

But geeeeeez—it’s too early, way too early to hammer down the gavel for a verdict. JC Penney leverage should stay around four times. Perhaps they’ll be downgraded, perhaps not. Within the next six months, we should see the majority of the in-store new and unique brands appear.

Hopefully, if you purchased JCP bonds you took our recommended 3% to 5% disciplined allocation. But if you are feeling blue about your position, search for “Bill Ackman’s Presentation on JCPenney,” by Steven Kiel on Seeking Alpha. You’ll read from others why you should remain patient.

And Now, Navistar
This company warrants another comment. We recommended the bonds in April.

Last week, Navistar (NAV) stunned everyone with a $1.99 per share loss when expectations were for a profit of 67 cents per share. Both the stock and bonds were massacred. However, Carl Icahn stepped up and purchased an additional 883,200 shares, which gives him an 11.8% ownership.

Our 2021 bonds did a swan dive down to 96 (gasp). That was ugly. It caused the downgrades to begin. S&P took Navistar from BB- down to B+. Fitch downgraded from BB to BB-. Moody’s has yet to publish their downgrade.

If Carl Icahn forces a merger with Navistar and Oshkosh (OSK), isn’t that a change of control event? I believe so. Sure, the financial performance stunk. But the second half of the year is usually Navistar’s best. On June 6, millions of bonds traded at 103 and 104. On the 7th, post earnings, the waterfall price event was swift and ugly.

We aren’t dug into this idea because egos won’t release us—we just think the game is still afoot with Icahn wearing Sherlock’s hat and cape. Stay tuned.

This just in: This is related to an Interim Rule that allowed NAV to sell trucks (engines) that were noncompliant with EPA rules. NAV's competitors sued saying it was not legal and just won, essentially. Going forward, NAV won't be able to use credits against the $2,000 fine (per engine) that they have been using.

This will most certainly hurt margins near term—but the ruling is not about the EGR technology they are trying to get certified. If it gets certified, then no fines.

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