3 Bulletproof Investments

Includes: CEG, GGGNP, MET
by: Don MacShane

One of the amazing things happening the market currently is that there are some investments that have little downside risk, and in fact offer high yields with as close to a sure thing that you can find today.

The problem is that the panic in the markets has created a situation where everything is suspect. An example of this is that GE (NYSE:GE) could go down the tubes, yet it is the most powerful corporation in the world.

If you actually believe that, then I would suggest you make a quick trip to the gun shop and get it over with. I have spent 38 years in the investment business, mainly focused on the fixed income area. The people who populate this area  tend to be pessimistic and more attuned to credit quality. They are not looking for the next Google (NASDAQ:GOOG), but are more concerned with the return of their money than the return on their money.

I will give Mark Twain credit for the last statement, but I think he would consider the following ideas reasonable. All three ideas are either exchange traded preferreds or debt. I will outline them in order of safety, although I feel they are all as safe as you are going to find.

The first one is a preferred issued by the Gabelli funds. The symbol is GGNPRA. This preferred was issued as part of the Gabelli Gold and Natural Resource Income Fund (OTC:GGGNP), which is a closed end fund. The purpose of this preferred issued was to provide leverage to the fund. Gabelli was very smart in that he did not issue the auction rate preferreds that many of of his competitors. Instead, he issued fixed rate preferreds to provide leverage to his closed end funds.

The amazing part is that these preferreds are rated AAA. They are rated AAA because they are subject to be called at par, if the value of the common stock in these funds declines to two times the value of the outstanding preferred. They issued $100 million of the preferred and the last quarterly report stated that the value of the common stock was $585 million dollars.

The next idea I can thank Mr. Buffet for, and it involves his recent purchase of Constellation Energy (NYSE:CEG). When Berkshire bought this firm two weeks ago, they wrote a check for $1 billion and promised to pay the existing shareholders $26.50 per share upon the completion of the merger. Of course, the deal is dependent on regulatory approval, but I doubt that will be a problem.

Here is the interesting part, Constellation Energy has an outstanding corporate debt instrument traded on the NYSE under the symbol CRGPRA. It is a bond with a $25 dollar par value, the coupon is 8.625% and it is callable in 2013. The current price is $21.00 and the current yield is 10.25%. The yield to call is 12.75%. These bonds will benefit from an increased rating once the merger is completed, and will also benefit from Mr. Buffet's deep pockets. I cannot imagine that they won't be called in 2013, or possibly a tender offer in the open market before then.

Lastly, I come to MetLife (NYSE:MET). Of course, it is difficult to research the investment portfolio and all insurance companies use leverage. MetLife is the oldest insurance company in the U.S and they tend to be quite conservative. They have and outstanding floating rate preferred that trades on the NYSE under the symbol METPRA. Here is the story. Three months ago, this preferred was trading near $20 dollars per share. It is now $10 dollars per share. There is no doubt that fear and emotion has created what I think is a great value. This preferred floats at a rate of 1% percent above 3 month libor quarterly or a minimum of 4%, with no upside limitation. The current yield is 10% and cannot go lower. The call date is 2010, but I doubt Met will call it. They could possibly have a tender auction because the size of the issue was $600 million dollars and they could easily buy it back for a substantial discount.

Here is the kicker:  if interest rates normalize in the next few years, 3 month libor could be 4% or 5% percent. In that case this preferred would trade for today's purchasers at a yield of 12.5% or 15% in the case of a 5% libor. Assuming we get through this crisis, where do you think this preferred would trade? My guess is $15-$20 dollars. Seems like a good risk reward to me.

Disclosure: Author holds positions in all of the above-mentioned stocks.