Your Preference Please! Stocks & Discount Bonds

Provided By

Besides convertible bonds, there are other types of bonds which could be investment vehicles for substantial capital gains. This historical piece offers some interesting information from the 1960s.

Some time ago there was a newspaper story of a bedridden Massachusetts farmer who swelled his initial $1,500 into millions by hunting out special situations. This farmer thought and read about the stock market every waking moment. He knew by heart the capitalization and earning power of almost every issue on the New York Stock Exchange.

His favorite purchases were preferred stocks with large accumulated dividends due and with their companies showing signs of strong earnings recovery. Bonds which were priced at big discounts from values of the properties behind them were also favored by him.

Preferred stocks with dividend arrears are generally highly speculative. The inability of companies to make full payments on their senior debts is strongly indicative of their marginal earning power or overcapitalization. In order to appraise the possibility of their earnings recovery, you would have to check earnings record, financial strength, management and many other things just as you would to invest in their common stocks.

A high market equity is as important to a preferred as to a bond or convertible bond. The interest on the bond should be adequately (at least potentially) covered by a thick cushion of earning power at least in most years. Just as you shouldn't buy a preferred unless you like its common, so you must like the underlying common stock enough to fall in love with its bond or convertible. If you don't like the common stock in the first place, then it would make no sense to buy into its related bond or convertible bond carrying a privilege of conversion into something which is basically unattractive.

There are, of course, all types of discount bonds, including railroad bonds, municipal bonds which include both revenue bonds and general obligation municipal bonds and, as a matter of fact, any bonds selling at a considerable discount from their par or face value.

After sliding downhill for about a year and a half, bond prices in general touched bottom early in 1960 and have since then headed generally upward. The primary factor in their price recovery was a substantial slacking of economic growth in the 1960-61 period.

Despite this price recovery, many high-quality issues such as the ten "discount bonds" recommended by the October 5, 1960, edition of Financial World were found still selling at fairly wide discount from par. They were: Alabama Power 3 1/2s, 1972; American Tel. & Tel. 23/4s, 1975; American Tobacco 3s, 1969; Cleveland Elec. Ilium. 3s, 1970; General Motors Acceptance 3s, 1969; Minneapolis-Honeywell 3.1s, 1972; Ohio Edison 3s, 1974; Pacific G.&E. 3s, 1971; Rochester G. & E. 34s, 1969; Standard Oil (N.J.) 2as, 1971.

The chief reason they continually sell at wide discount from par is that they carry coupon rates which are still relatively low by today's standards. As a result, they should offer further capital appreciation possibilities.

"Meanwhile," said Financial World, "the investor has a source of steady income; the rating of A or better accorded them by Standard and Poor's indicates that both interest and principal are safe for all practical purposes. The chief risk in holding them is merely that associated with short-term fluctuations in the bond market—a risk that doesn't seem particularly large under present conditions.

Take a fresh look at preferred stocks and discounted bonds in relation to today's market. There may be more opportunities than you realize!

This article is a small snippet from

"Revealed: The Surefire Way To Make Unreal Profits Using A Secret Formula For The Stock Market"

Find Out More About

copyright 2007