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Tracy V. Maitland, president of New York-based Advent Capital Management, is one of the few people who have smiled throughout the recent stock market downturn. That’s because he has cast his fortunes with convertible securities–and he thinks you should too. Convertible securities are fixed-income instruments (either bonds or preferred stock) that can be converted into common or preferred stock or another type of debt of the issuing company under specified circumstances. Managed properly, Maitland says, they can be “a great way for an individual to invest in the market and generate equitylike returns with more of a fixed-incomelike risk profile (see “Beating the Bear,” this issue).”
Advent Capital, ranked No. 15 on the BE ASSET MANAGERS list, manages approximately $1 billion for high net worth individuals, corporate and state pension funds, foundations, and endowments. Maitland says his 5-year-old firm only invests in convertibles, picking high quality, creditworthy companies that have solid fundamentals, excellent growth prospects, and a history of solid cash flow. “We want to buy companies we know will be in business so that the bond value or interest is always going to be paid, but our upside [potential] is in the fundamentals of the underlying stock,” he explains. “The fundamentals of the underlying company drive the convertible price up along with the stock.”
The benefits of buying convertibles breaks down like this: If you buy a convertible bond that pays 5% interest in five years, and the company’s stock goes up, you can expect to capture 75%-85% of the growth of the stock while knowing that the most you risk in five years is earning 5%–plus you get your money back, assuming you bought the convertible at its issue price. That might be why, according to Maitland, the convertible securities market has grown from about $50 billion 10 years ago to approximately $270 billion this year. For this month’s Private Screening, he suggests convertible securities in the following five companies:
COR Therapeutics (Nasdaq: CORR) is one of the few biotech companies to remain profitable during the downturn. The company makes proven heart medications that prevent heart attacks, which have allowed it to capture about 45% of the market share over heavyweights Merck and Johnson & Johnson.
First Data Corp. (NYSE: FDC) is the largest credit card processing company in the United States. Maitland says the company, which also owns Western Union, is “a safe way to play technology and play on the economy,” because First Data receives a fee for every credit card transaction or wire transfer it processes.
The BISYS Group Inc. (Nasdaq: BSYS), which provides outsourcing services to more than 11,000 financial institutions and corporations in the United States and Europe, is one of the leading providers of check-imaging systems.
Lamar Advertising (Nasdaq: LAMR) controls one-third of the outdoor advertising industry (i.e., billboards, highway message boards). The firm built its position by acquiring smaller firms, but recently benefited from advertisers’ need to find low-cost ways to reach consumers as their profits suffer. Maitland expects Lamar to grow by 20% this year.