Friday Fixed Income - August 17, 2018

Another double in waiting is indicated by the bond market.

music selection:“Little Miss Can’t Be Wrong” — Spin Doctors

On Friday’s I like to cover the fixed income investing universe. My favorite way to invest here is by buying corporate high yield bonds that are selling at a steep discount to par that I think will either mature or liquidate at a fair price. I have made great money that way. Better than with equities and options. My second favorite, which has been the subject of many FFI posts; is to buy closed end funds with high yields that are trading at a discount to Net Asset Value (NAV.) Today, I’m going to show you a third way to profit from bond research. You see, the bond market is often called the “smart money”. It is mostly institutional investors that have huge teams of analysts, attorneys, and expertise in multiple industries to help them evaluate a security. Sometimes, a stock (the equity) will fall 50% or more while the same company’s bonds barely budge from trading around par. Nine times out of ten or better, in the disagreement regarding the company’s future, the bond market has it right. You can expect the equity of these beaten down companies that still have the faith of the bond community to double or better over the next 18 to 24 months.I shared some high conviction ideas in this space here. Today, I’m sharing a new high conviction idea driven by a disconnect between share prices and bond pricing.

Ferroglobe PLC (GSM) is a producer of iron alloy materials.This is a highly cyclical commodity business. GSM insulates itself partially from commodity cycles with vertical integration.It owns mines for its own raw materials. Traditionally, this company has had its share price track with the commodity price for silicon metals. Lately that correlation has broken down and the stock has tanked while metal prices rally. Despite the pessimism of equity investors, bond holders are still willing to pay a premium to par for its bonds. Historically, the stock has trade around 23 times Enterprise Value to Earnings Before Interest Taxes Depreciation and Amortization (EV/EBITDA). It is currently trading around a scant 7 times EBITDA. Reversion to mean would give us a triple. We don’t need reversion to mean however as management is projecting organic growth of EBITDA to double in the following 12 months. Logically, the share price should double as well. If we get reversion to mean at the same time, this is a six bagger. Management reports quarterly numbers in just a couple weeks. They have beat estimates in the past 3 out of 4 quarters and I expect a blowout quarter. GSM is a buy up to 9.75.I purchased shares today at 7.25.

1 2
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.