Hybrid Vigor: Volume 1 Issue 23 "To Buy or Not to Buy"

Dear Friends,

From the category of “be careful what you wish for,” we’ve certainly had a resurgence of volatility in recent weeks.  For those who’ve been on the right side, opportunities have definitely come (and perhaps gone).  We hope that was your experience.

As we promised last week, we highlight in this issue the long-awaited arrival of Illumina in the Hillside Ugly 20, as measured by our proprietary HARP (Hillside Adjusted Risk Points) measure.  As we acknowledge, there’s much to recommend with this situation—solid company and credit, big historical volatility, decent structure. The only problem is price—and now the price point is getting tricky.  We use both of our core proprietary measures, HARP and HOCS (Hillside Overall Convertible Score), to examine Illumina, focusing on the higher-priced 0.5% issue.

We acknowledge that for outright investors, stock selection generally trumps bond valuation, and we address this issue in a standalone piece here.  The question of valuation in regard to convertible selection has never been a simple one. Indeed, we created HARP and HOCS to bridge the gap between model-based analysis and the realities of convertible trading and management.

In this issue we also use HOCS to compare two similar, but different, companies and their convertibles. We hope you’ll find the result, in keeping with one of this week’s highlight names, illuminating.

Speaking of HOCS, we are now, as we explain inside, on version 1.5. We continue to refine this measure to make it more robust and informative while keeping its basic countercyclical principles intact.  (Unlike traditional capitalization and price-weighted measures, HOCS rises when value rises).

I’m off to Boston, where I’ll be moderating a panel titled “The New Fixed Income” tomorrow at the sixth annual FundForum USA conference.  We’ll be discussing convertibles as the ideal investment (providing income and both capital preservation and appreciation potential) when the price is right, and some ideas of other assets that may stand in for traditional convertibles when the price is wrong.  It promises to be an interesting discussion. I’m very humbled to have been asked to run a session at this outstanding event.


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