| BUSINESSWEEK ONLINE : JUNE 28, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR
A Safer Ride on the Net Convertibles let you turn securities into shares Internet stocks have fallen by nearly half from their April highs, but one class of Net securities--convertibles--has suffered somewhat less damage. Since November, at least a dozen dot.com companies have floated convertible bonds or preferred stock. Their recent performance supports the idea that convertibles are a a less risky way to play one of the market's wildest sectors. Net convertibles come from a range of New Economy household names, including Amazon.com (AMZN) and America Online (AOL). Make no mistake: These are speculative-grade Net issues and are not for widows and orphans. But to some risk-oriented investors, the securities are appealing because they pay dividends or interest. In Amazon's case, the yield to maturity is about 8.1%. Convertibles can be exchanged for common shares at a predetermined ratio--say, about 6.4 shares of Amazon for each $1,000 bond. These factors give investors a bit of a cushion. Plus, analysts from Merrill Lynch and Web site Convertbond.com say that many Net convertibles are now cheap (see table). When investing in Net convertibles, the first step is to find stocks you like. That's because convertibles tend to follow their underlying shares. Then ask whether the convertible has an advantage over the stock. When a convertible bond trades well above its par value of $1,000, it often tracks its underlying stock so closely that the two are nearly indistinguishable. Examples include securities from CNET, Exodus, and DoubleClick. Although expensive, they offer an advantage over the stock in the form of current yields of 3% or more, says Ravi Malik, portfolio manager at Froley Revy Investment, a Los Angeles convertible specialist. At the other end of the spectrum are beaten-down issues, such as one from Net service provider MindSpring Enterprises. MindSpring's convertible fetches $767, close to what Froley Revy analyst Shannon Krizo figures is the $730 value of its bond portion alone. In theory, the bond value is a floor below which a convertible won't fall. True, a further rise in interest rates would lower the convertible's value. But MindSpring is profitable, and Malik doesn't anticipate a drop in its credit standing. He thus thinks the convertible price isn't likely to drop much more. When buying convertibles, check whether the issuer can call the bond, forcing you to redeem it under certain conditions. If you paid a premium over the value of the common shares, you might not be able to recoup it from dividend or interest payments. You can do breakeven analyses on a wide range of issues at www.convertbond.com. High dealer markups make it expensive for investors with less than $20,000 to put down to buy convertibles. That may change soon. Steve Seefeld, owner of Convertbond.com, plans to launch an online network of convertible securities brokers this summer. That could cut transaction costs by fostering competition for small trades. Although Net convertibles are safer than the related stocks, they are still volatile. Conventional wisdom says that while a convertible tends to rise about two-thirds as much as its stock, it falls by only half as much. But during May, the dozen names in Merrill Lynch's Internet convertible index fell 13.9%, or 77% as much as the stocks. The index is still up 39% this year through June 10. If you're daunted by the prospect of buying individual Net convertibles, some mutual funds let you in on the action. Advisors Series Trust Rockhaven Premier Dividend, Calamos Convertible, and Nations Institutional Reserves Capital Income all have small Net holdings. Another alternative is a bond introduced by Salomon Smith Barney in May that tracks TheStreet.com's Internet index. The bond, which trades on the American Stock Exchange, pays no interest. Losses are limited to 10%. The seven-year issue can be called between its third and sixth years. If that happens, appreciation is capped at 25% annually, noncompounded. Whatever Net-related security you choose, be prepared to sacrifice some upside potential. That's the price for one of Internet investing's scarcest commodities: a little protection. BY ANNE TERGESEN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS A Safer Ride on the Net TABLE: A Batch of Net Plays INTERACT E-Mail to Business Week Online | |||
