There’s no sugarcoating it. These have been bad times for the convertible market.
Performance has been lousy. We’ve gone down pretty hard with stocks, and we’ve struggled to regain ground on the way back up. Valuations are getting more attractive, to be sure, but they’re hardly at the “back up the truck” levels of 2005 or 2008 just yet. Layoffs are happening, nothing new there, and we’ve surely not heard the last of them. The 3% yield on the 10-year Treasury that was supposed to trigger a wave of issuance remains out of reach, and convincing companies to bring new deals with their shares down 20%, 30%, 50%, pick a number—it ain’t easy.
One thing we do know from one sage or another, though, is that even if history doesn’t repeat itself, it does rhyme. While market conditions since the financial crisis have been unlike anything most of us had known earlier in our careers, there are still patterns. Ups and downs. Convertibles are nothing if not countercyclical—bad times are inevitably followed by good ones.
This begs the question, of course, if we’ve seen the worst. It’s hard to make a convincing case for that. But it’s even harder to time the market. The one thing we know with relative certainty is that investors who buy convertibles at attractive prices tend to do quite well.
I was the guest on Bloomberg Radio “Taking Stock” with Kathleen Hays and Pimm Fox last week (see this link, I start at around 5:00 in). Those who know me know I’m no Pollyanna—indeed, I have been reprimanded by at least one boss for not being more generically upbeat. When my host asked me about my dedication to convertibles, I told her that I thought they were nearly foolproof if used properly—which included being attentive to valuation.
This may not be the best time ever to buy convertibles, but it’s better than it’s been for a while. Stocks are well off their highs and convertible-type stocks, even more so. If you drive looking through the front mirror, you’re getting interested in buying.
(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).