A significant sell-off in many bonds and other income investments has recently occurred due to concerns about a potential rise in interest rates. Because of this, I have been focusing on writing about buying opportunities in select high-yield stocks. I believe that the recent rise in interest rates will cause a slowdown in both housing and autos which have been two of the strongest sectors in the economy. If the economy slows this fall, it will be difficult for interest rates to rise further or for the Federal Reserve to "taper". Numerous opportunities remain to buy assets that have both upside potential in terms of capital gains and a very generous dividend, so here are some additional picks that could be poised to outperform for the rest of 2013 (due to either high levels of income, upside potential or both):
Pacholder High Yield Fund (PHF) is a closed end fund or "CEF" that primarily invests in high yield bonds. This fund's investment advisor is JP Morgan Investment Management Inc., which is an industry leader in bonds and equities. A recent sell-off in CEF's that invest in bonds has put pressure on this stock. Just weeks ago, this fund was trading for over $9, but it is cheaper now which is providing investors with an ideal buying opportunity to consider.
As the chart above shows, this fund is already starting to rebound from the sell-off in high yield or "junk bonds", but it appears to have more room to run and it could be headed back to somewhere between the 50-day moving average of $8.61 and the 200-day moving average of $8.81 per share. That means investors who buy now could be poised for upside potential and a generous dividend yield of about 9.4%. This fund pays a dividend of 6.5 cents per share every month and this is usually paid towards the end of the month, so investors who buy soon would be poised to collect the next payment.
There are a couple of reasons why this CEF appears poised for a rebound, back to around the $9 level. First of all, the sell-off in junk bonds seems excessive because an improving economy means default risks are reduced and this can lead to higher credit ratings for junk bond borrowers. Secondly, junk bonds typically have much shorter durations and this is particularly true for most of the holdings in this fund. For example, about 10% of its holdings are due to mature in 1 year or less, nearly 50% of its holdings are due to mature in 1 to 4 years, and about 33% is scheduled to mature in 5 to 9 years. With around 60% of its portfolio invested in bonds that mature in less than 5 years, the duration risk in this CEF is limited. Furthermore, because of the 9.4% yield and the shorter duration bonds it invests in, this fund has historically traded for a significant premium of nearly 7% to net asset value or "NAV". However, it now trades for a discount to NAV of nearly 3%. When the share price dipped below the NAV the last couple times in November 2012 and in June, it was not long before it traded back over NAV.
There are potential downside risks to consider such as liquidity, interest rates, and the chance for a recession which could put junk bond borrowers in tough bind, however, with the economy slowly improving, that risk appears limited now. Plus, with the share price considerably below the historical premium this CEF has traded for in the past year (by about 10%), the downside risks could be limited at these levels.
With a share price below NAV, a monthly dividend payment that yields 9.4%, top investment management from a JPMorgan (JPM) subsidiary, and a history of rebounding back over NAV, this CEF looks like an ideal buy for both short term traders who want to consider it for the rebound potential, and for long term investors seeking high levels of monthly income in a professionally managed and diversified investment. Investors who have bought this CEF on pullbacks in the past and held to collect the generous dividend have been well-rewarded in the past and that is why this current dip is an ideal buying opportunity. Also, when you consider that high yield bonds are rebounding sharply (see chart for junk bond ETF below), it seems like it is just a matter of time before this CEF sees a more robust rebound as well.
Here are some key points for PHF:
- Current share price: $8.44
- The 52 week range is $7.84 to $10.13
- Earnings estimates for 2013: n/a
- Earnings estimates for 2014: n/a
- Annual dividend: 6.5 cents per month, which yields 9.4%
SPDR Barclays Capital High Yield Bond (JNK) is an exchange traded fund that invests in high-yield bonds. Investors who are willing to accept a lower yield when compared to what select CEF's (like the one discussed above) could find this exchange traded fund or "ETF" to be attractive. That's because ETF's like this were designed to trade at or near current net asset values and also provide significant levels of liquidity for investors. This means liquidity risks are potentially reduced when compared to other investments.
As the chart above shows, junk bonds took a beating in the recent sell-off but have already started an impressive comeback as the markets realize that the rise in rates might not come as quickly as expected. Also, since junk bonds tend to be shorter in duration, this asset class did not deserve to fall so much. In the recent pullback, shares of this ETF dipped well below the 50-day moving average of $40.18 and even below the 200-day moving average of $39.69. However, a powerful rebound is underway and this ETF is now trading back above both the 50 and 200-day average. (This is another reason why I believe CEF's like "PHF" mentioned above will also follow through shortly with moves back to at or above the moving averages.)
This ETF also pays dividends on a monthly basis at the rate of roughly 20 cents per share (the monthly dividend is subject to fluctuation), and this provides a yield of nearly 7%. While this ETF is now less of a rebound play, it is worth buying on pullbacks and also for the liquidity and relatively high yields it provides. Investors who want the shortest duration possible can consider another ETF which is called SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK).
Here are some key points for JNK:
- Current share price: $40.46
- The 52 week range is $38.21 to $41.95
- Earnings estimates for 2013: n/a
- Earnings estimates for 2014: n/a
- Annual dividend: about 20 cents per month, which yields nearly 7%
Chimera Investment Corp. (CIM) shares recently dipped to about $2.80, as investors hastily sold anything with a yield in the past couple of weeks. However, this mortgage real estate investment trust or "mREIT" has also started to rebound and it could be poised for additional gains and overall outperformance for the rest of this year.
As the chart shows, this stock has been under pressure for the past few weeks. However, it is already rebounding off the recent lows and it could be poised to head back towards the $3.20 range which is where it was trading in April and May.
Chimera invests primarily in mortgage securities and it is managed by a subsidiary of Annaly Capital Management (NLY) which is called the "Fixed Income Discount Advisory Co." I think this is potentially significant because this same Annaly subsidiary also managed Crexus Investment Corp., (another REIT) which not too long ago was bought by Annaly for about $840 million. As Chimera's investment manager, it already has detailed knowledge on assets, operations and the investment portfolio. That means plenty of due diligence is already in place. I am not counting on a buyout of Chimera, but I would not completely rule it out either.
You definitely need to consider downside risks of investing in the mortgage REIT sector because it seems like every few months or so there is an issue that prompts some type of major sell-off. The various risks include interest rates, Federal Reserve policy, regulations on the status of REIT's, just to name a few. Furthermore, companies in this sector tend to raise capital on a relatively frequent basis, and can be prone to dividend cuts when earnings decline, and that also typically sparks a sell-off. However, investors who have bought Chimera during past pullbacks have typically done well over the long term by waiting for a rebound and also by collecting a 36 cent per share dividend that yields about 12.3%.
One famous billionaire, Leon Cooperman seems to feel that Chimera is poised to outperform for the rest of 2013 and he included this stock as one of his top ten picks for the rest of the year. It's worth noting that his top ten picks at the "Delivering Alpha Conference" for last year all performed well. With Chimera offering a 12.3% dividend, and with the shares still trading well below recent highs, this stock is worth considering, especially on dips. However, I would not go too heavy on any mortgage REIT stock due to the volatility this sector seems to attract.
Here are some key points for CIM:
- Current share price: $2.97
- The 52 week range is $1.81 to $3.34
- Earnings estimates for 2013: 40 cents per share
- Earnings estimates for 2014: 40 cents per share
- Annual dividend: 36 cents per share which yields 12.3%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.