When considering that convertible bonds are among the fixed income assets that behave most like stocks, 2022 was a dreadful year to be engaged with this asset class.
The SPDR Barclays Convertible Securities ETF (NYSEArca: CWB), which is the largest exchange traded fund dedicated to convertible bonds, slid 20.8% in 2022 — a performance that was worse than the 13% shed by the Bloomberg US Aggregate Bond Index. Add to that, CWB was more than twice as volatile as the “Agg.”
In simple terms, convertible bonds are corporate debt that can be converted into shares of the issuer’s common equity by bondholders. As such, it’s not surprising that convertibles are highly correlated to the gyrations of equity markets. That was a bad thing last year, but it’s proving to be a plus in early 2023 as CWB posted a January gain of 6.01%. That’s fueling speculation that more upside could be in store for convertible debt.
Investors that want to embrace individual convertibles, some of which are also sporting high yields to maturity, have ample choices to consider.
“These include converts from Redfin (RDFN), Coinbase Global (COIN), Microstrategy (MSTR), Peloton Interactive (PTON), Lucid Group (LCID), and DraftKings (DKNG), some of which have yields to maturity in the double-digits. For instance, Redfin’s zero-coupon convertible due in 2025 trades at 64 cents on the dollar and yields 17%. Microstrategy’s zero-coupon issue maturing in 2027 trades at 44 cents and has a 21% yield to maturity,” reported Andrew Bary for Barron’s.
Peloton’s convertibles are among the 303 issues found in CWB, as are Coinbase and MicroStrategy convertibles. In the case of the latter pair, that gives CWB some leverage, albeit modest, to recovering bitcoin prices.
For investors considering individual convertibles, DraftKings could be one to consider because the stock is higher by 31.61% year-to-date, and some analysts believe the sportsbook operator could turn profitable sooner than expected.
In a note to clients last month, Morgan Stanley analyst Stephen Grambling said that the gaming company could be profitable on the basis of earnings before interest, taxes, depreciation, and amortization (EBITDA) in the second quarter, ahead of the operator’s own guidance calling for profitability in the fourth quarter.
The average price target on DraftKings is $20.55, implying a decent amount of upside from the January 31 closing price of $14.99. The broader convertible space offers other perks.
“Michael Youngworth, a convertibles strategist at BofA Securities, has pointed out two attractive aspects of convertibles: They often are the only debt of the issuing company and the low—or zero—rates means little interest expense,” concluded Barron’s.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.