HYBRID VIGOR: VOL 2 ISSUE 42 "What Will You Leave Us This Time?"

Two sources of joy—the career of American Pharoah and the Mets’ unexpectedly wonderful season—are now over. American Pharoah was probably going to cap off his time as a racehorse by winning the Breeders’ Cup Classic on Saturday no matter who ran against him, but when the two horses with the best chances of making him work hard early scratched, the race turned into a leisurely stroll. A fast leisurely stroll. Thank you, American Pharoah.

The Mets had a tremendous year. They were better than the Nationals (not on paper, but in the flesh), better than the Dodgers (at far lower cost), and better than the Cubs (because good pitching does usually beat good hitting). They were not better than the Royals, though blowing three late leads reminds us of Cat Stevens’ line “the patches make the goodbye harder still.” But the outstanding starting pitchers are very young, and what they leave us this time is a winter of anticipation for many summers to come.

What do we have with convertibles to get us through the winter? Perhaps the powerhouse recovery in October will lead to one last flurry of new activity. We can hope. One leading issuer that appears to have walked away from convertibles, at least for now, is Molina Healthcare, about which we’ve spoken favorably a number of times. But Molina issued equity earlier this year and announced this morning it’s going to sell straight debt. With a name investors know and like, in a market still hungry for hybrid paper, we’re a bit surprised Molina has turned its back on convertibles. Even after a decline of about 25% from recent highs (mostly in a bad healthcare tape, though last week’s earnings report was so-so and the conference call did not go particularly well), Molina’s lowest-priced convertible is still in the low 120’s, virtually assuring favorable reception for a new balanced bond. Oh, well.

None of us is getting younger, and none of us is getting out of this alive. Rather than looking back wistfully on champions and issuers past, we need to move on and find new issuers to take advantage of our ever-unappreciated asset class. When we find names we think make interesting candidates, we will continue to profile them in our On-Deck Circle feature—doing our part to keep the baseball metaphor alive through the winter’s chill.

* A principal of Hillside Advisors has a position in Molina Healthcare securities

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).