When we published our first Ugly 20 list, we got a number of inquiries as to why Citrix Systems' 0.5% didn't make the grade. It wasn't all about the bass--it was the price point. The bonds looked extremely rich but were a little too close to par to qualify for our high-HARP (Hillside Adjusted Risk Points) list, which is designed to identify bonds most at risk for a blend of stock declines and time decay.
Our second measure, HOCS (Hillside Overall Convertible Score), can rank a wider range of bonds and, unlike HARP, is designed at least as much to identify attractive bonds as to warn about overpriced ones. That said, HOCS is still a highly effective canary in the convertible mine. We're currently developing HOCS 2.0, which will be similar to the initial version but more robust, less subjective and more dispersed, making it easier to separate the wheat from the chaff.
In the midst of this process we looked at Citrix this morning. Coming into today Citrix had some of the worst scores around--33 Overall, 35 Growth and 27 Safety. The first two scores didn't surprise us but the third did. Turns out that although Citrix is in solid financial shape the numbers weren't strong enough to offset the intrinsic unfavorability of the bond.
This morning, with the bond trading down around 102 with the stock down about four points (reflecting a downward move on an astonishingly high delta, or cheapening, whichever you prefer), the transitional HOCS (call it 1.5) scores are substantially higher. Now they're 40 Overall/42 Growth/35 Safety. But make no mistake. These are still lousy scores (50 is designed to be roughly average--in practice growth scores tend to average a bit higher than 50 and safety a bit lower). That investment grade cover still costs way too much.
How rich are the bonds according to HOCS 1.5? Well, they'd need to drop a cool six points, with the stock here at 60 and change, to get an overall score of 50.