Why Ford's Convertible Bonds Are a Great Buy

Posted by: Lauren Young on August 11, 2009

Forget Ford (F) stock.

Bill Feingold, co-founder of Hillside Advisors, Minyanville blogger, and author of The Undoing of Cowardice, says Ford’s convertible bonds are a great buy.

“For longer-term holders, the convertible lets you collect most of the stock’s upside while giving you a tremendous amount of downside protection,” Feingold says. Convertible bonds are corporate bonds that can be exchanged, at the option of the holder, for a specific number of shares of a company’s preferred or common stock.

The convertibles market collapsed last September after Lehman Brothers filed for bankruptcy protection. That forced over-leveraged hedge funds that had taken long bets on convertible bonds, offset by short bets on the corresponding stocks, to sell their convertibles holdings. As a result, value-minded investors have pounced.

Feingold offers up three scenarios for Ford’s convertible bondholders when the company’s bonds effectively mature in 2016.

# 1: The stock is flat.

“The bonds are now around $108 with the stock around $7.75,” Feingold says. “Assume the company does not pay any stock dividends during that time, and that’s a pretty good assumption because of the debt load. Bondholders will incur a $8 capital loss while the stock is flat. But bondholders will collect a $4.25 annual coupon for more than seven years, totaling about $30 over the period. So they’ll end up with $22.50 more than initially (a gain of over 20% vs. zero on the stock), and they’ll be collecting the income throughout the period, so it’s even better than it sounds.”

Advantage: Bonds.

# 2: The stock doubles.

“I’m glossing over a couple of details, but essentially the bonds will go to their conversion value of $168, and holders will have collected the $30 in income.” Feingold says. “The total is $198 for a gain of well over 80%, versus a 100% gain in the stock.”

Advantage: Stock (but the bonds aren’t far behind).

# 3: The stock is cut in half.

“Bondholders get the exact result as in scenario one, a gain of over 20% over the period,” he says. “Meanwhile, stockholders are down 50%. Huge advantage to the bonds. This is the downside protection convertibles give long-term holders.”

Advantage: Bonds.

For investors looking to research bonds, Feingold recommends FINRA’s website.

Reader Comments

rainer

August 11, 2009 8:49 PM

one could predict years ahead delta air lines would go bankrupt. it was the only way they could stay competitive with the other legacy airlines that bankrupted.

ford has to go bankrupt to compete with thenlower costs and govt help chrysler and GM have received and will continue to receive.

the writer needs to not overlook this fourth scenario.

Bill Feingold

August 12, 2009 7:04 PM

Rainer has a good point--but I note that in bankruptcy the bonds may have significant recovery value, as Ford has a lot of hard assets, while the stock will have none. So both bonds and stock will incur losses, but bonds probably will lose significantly less in percentage terms.

ProfessorDonAbrams

August 29, 2009 9:42 PM

The Ford Motor convertible bond, as you have explained, is normally more secure than common stock.

So why not combine the convertible with a short sale ?

Isn’t this dangerous?
Dangerous - no. Smart thinking - yes.

Allow me to explain.

Through the joint operation of the convertible bond and the short sale, your best offense, and, defense, is a battle plan against financial loss.

By combining the Ford convertible bond with the speculative short sale of the common stock, paradoxically, you reduce your risk.

My hero, Professor Smarba did exactly this on his totally transparent website www.profittaker.info.

He completed his first plan with an amazing 382% annualized profit.

He now has a second Ford plan operating with a 62% annualized profit.

By teaming up these two investment techniques, you’ll practically eliminate the risk of buying the convertibles alone, at the same time avoiding the usual dangers of short selling.

Working together - It works!

alan

October 7, 2009 7:32 AM

what is symbol for ford conv.? how do you look up conv. bonds? what web site?

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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