Views and opinions expressed here are solely those of the author and do not necessarily represent those of Schaeffer's Investment Research.
It's always fun to beat the big boys to the punch. I've been talking in this space about the upcoming improvements in the New York Stock Exchange's bond-trading capabilities and what this could mean for the retail investor. I'm especially excited about what this could do down the road for the convertible-bond market.
It's going to take a while for this all to play out, but there's a great opportunity here for the individual who's willing to do a little extra homework to start crafting his or her portfolio to fit his or her views and needs far better than was ever possible before.
If you'll indulge me, I'm going to provide a bunch of pieces taking you through some of the tools you have at your disposal. One such tool, which I mentioned last month, is the free site that provides up-to-the-minute historical prices for corporate bonds. This system, known as TRACE (for Trade Reporting and Compliance Engine), has been around for about five years. To those of us who've been connected with the bond market for longer than that, it's remarkable-and not necessarily pleasant to many-how much valuable information is now freely available.
The link, again, is here. From this link, to look up a bond, click on the Bond Portfolio Watch tab, then choose Bond Search and click "I Agree." At that point you can look up a bond, either by the issuer or by the bond's characteristics.
Let's say you knew that Amgen (AMGN:  sentiment, chart, options) had several convertible bonds outstanding and you were interested in finding a conservative way to invest in the company on its recent weakness. You'd search by company name, typing in "Amgen," and you'd find a list of bonds issued by the biotech giant. You'd notice that three of the bonds have much lower coupons than the rest-this is often a sign that the bonds are convertible (in case you didn't already know the coupon), since with convertibles you give up coupon income in exchange for equity upside.
Suppose you're interested in the Amgen 0.125 percent of 02/01/2011. First, click on the "Descriptive Data" link associated with the bond at the far right. You'll see that the issue information contains "CVT", indicating that this bond is indeed convertible. Next, go back to the previous screen and click on "Time and Sales." In this screen, if you don't specify a date range, today's trades will appear: if there is no activity from today, you'll have to enter a range to find recent transactions. Note that the symbol "AMGN.GM" appears. This symbol, or something like it, should be the ticker that will be used when the new NYSE trading system takes effect in several weeks.
In this case, because these bonds are liquid and active, when you click "Submit" without entering a date range, you're still likely to find a good price history. For example, on April 2, 2007, you'll see that at 1:54:05 PM, two million bonds (indicated by 2000 in the Quantity column, as a single bond would denote $1,000 face) traded at a price of 91.375 for a yield of 2.505 percent to the 2011 maturity. Note that the yield comes almost entirely from price appreciation to par value, from 91.375 to 100 over slightly under four years, because the coupon is so tiny.
Now, nobody is buying these bonds just for the yield. People are buying them as a conservative common-stock substitute with assurance of return of principal, which in this case is a moderate positive yield because the bonds are below par. The TRACE system is not, at least as of yet, for analyzing convertibles. But your loyal correspondent here, upon request and time permitting, will tell you how the convertible of your choosing should move with respect to the underlying stock. You can match up the quote on the convertible bond from TRACE to the price of the underlying stock (using whatever stock-pricing resource you prefer) to get a good sense of the static relationship between the convertible and the stock.
The TRACE system can also be used to screen for bonds that fit a profile you seek. For instance, you might be interested in corporate bonds rated "BB", maturing in five to eight years, and paying a coupon of at least six percent. The screening layout is pretty self-explanatory: for a specific rating such as "BB," just select the rating as both the high and low points of the range.
You might be surprised to find that a familiar name such as Wendy's International (WEN: sentiment, chart, options) has a bond with a 6.2-percent coupon that matures in 2014 and recently traded at 97, making the bond's yield to maturity an appealing 6.73 percent.
Give the system a whirl, initially to educate yourself, and then perhaps to help broaden your portfolio. As always, please feel more than free to email me.
Bill Feingold (bfeingold@sir-inc.com)
Schaeffer's Investment Research's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. We call this Expectational Analysis®. Click here for details.
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