2 Top Bonds for Rising Rates

06/20/2011 9:54 am EST

Focus: STOCKS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Low interest rates won't last, so it's a great time to pick up some high-octane bargains while they're cheap, say Marilyn Cohen of Bond Smart Investor.

It is most unusual for visible investment managers to make market calls...and be thrilled to be wrong.

Well, that’s me. I am absolutely thrilled (and astounded) that interest rates have stayed so low.

Thirty-two years of bond-market experience over numerous cycles, spikes, currency problems, defaults, credit blow-ups, and near market-death experiences haven’t given most of us a frame of reference for what is occurring now.

The US has gynormous Federal deficits, an eroding dollar, out-of-control entitlements, a lousy economy, high commodity prices, and a capitalistic compass that no longer values true north. What a mess.

So, as I began this article, I continue to be wrong about higher interest rates. But that’s just for now.

I can see an ever-so-faint light at the end of the tunnel. It’s hard to tell if it’s a train, a bus, a truck, or just a minivan. But I can see that it’s coming straight for us bond investors, in the form of higher interest rates.

Reduced deficits would help. But do you really think Congress has the will to reduce our deficits by $5 to $7 trillion over the next several years? Doubtful, from where I sit.

Now for some of my High-Octane recommendations...

NEXT: Bond Recommendations

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Jabil Circuit
Hold your nose for this recommended High Octane bond—only because of its price.

Jabil Circuit is an electronics-solutions company. It designs and produces electronic products of all kinds. Jabil has operations in 21 countries with 85,000 employees. In other words, this is no fly spec on the wall.

With 2010 revenues of $13.4 billion, the company is profitable. It has cash on its balance sheet. Its positive cash flow will fund its growth. Its total debt to total operating EBITDA should be under 3x when considering their off-balance-sheet securitizations and operating leases, according to Fitch.

What about interest coverage? It is around 9x. Jabil’s ability to design, produce, and distribute electronics for the personal computing, communications, and auto markets places the company in a diversified field. This is no one-trick-pony.

Buy the Jabil Circuit non-callable 7.75% bond (CUSIP: 466313AE3) due July 15, 2016.

BE Aerospace
Don’t pass on this idea. Don’t be turned off because of the premium price. Don’t shudder because of the industry it inhabits.

BE Aerospace is the largest global manufacturer of aircraft cabin-interior equipment. It serves both commercial airlines and business jets. The products are air frames, seating, and food and beverage equipment.

You may ask, who are BE Aerospace customers? Most every airline, that’s who. Boeing and Airbus represent less than 10% of their business. Foreign markets generate 50% of BE Aerospace’s revenues.

With a strong balance sheet, good liquidity, and the first bond maturity in 2018 (although callable in 2013), the CFO has done a fine job.

With the global recovery improving and the airline industry running at levels not seen in a while, the company is figuratively flying high. If you’ve traveled lately, you’re likely familiar with the term "packed like sardines" in most languages.

BE Aerospace has a $3.2 billion backlog that will keep them busy for the next few years. Their lightweight seats are perfect for an industry where 30% to 40% of an airline’s cost goes to fuel. So newer planes with lighter interiors, seats, and cabin equipment greatly improve fuel efficiency.

Long-term debt net of cash is $1.1 billion, and there is a $1 billion revolver that remains undrawn. It’s all systems go for BE Aerospace.

Buy the BE Aerospace callable 8.50% bond (CUSIP: 055381AQ0) due July 1, 2018.

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