Archive for the 'Bonds' Category

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Summary

After global merchandise trade dropped ~20% in the wake of the Covid-19 policy response, shares of shipping companies collapsed, underperforming even the airline ETF. The industry now trades cheaper than at any time on this side of the millennium - less than 25% of liquidation value for some companies. Braxton believes this is unwarranted. Even during the seasonally weakest month of year, tanker earnings are still covering operating costs. In spite of analyst downgrades and widespread panic, tanker companies have used hefty profits from storing excess oil to rapidly deleverage.
 

Structural Balance

Although ULCV containerships are currently garnering far better rates than tankers, Braxton feels that this masks a precarious structural balance between supply and demand. Containership demand has actually plummeted, and rates are only being propped up by an ad hoc cartel of dubious legality. Whereas ample tanker demolition candidates provide a cushion, a young fleet severely limits scrapping potential for ULCVs. Worse, new capacity to the tune of 24% of the existing ULCV fleet is set to hit the water over the coming years.
 

International Seaways

Braxton discusses corporate governance in the industry and shares a favorite current tanker pick - International Seaways. INSW trades at half of liquidation value, with its strong balance sheet further fortified by an FSO joint venture with Euronav that generates consistent contracted cash flow. The company is repurchasing shares.
 

Distressed Mortgage Notes

Braxton outlines his investment in the Navios Maritime Acquisition Corporation First Priority Ship Mortgage Notes due 2021. The bonds trade at a highly distressed valuation, despite solid covenants and a short time to maturity. Braxton says that the value of the underlying fleet and NWC fully covers the bonds and implies a positive value for the equity.
 
NMAC is now aggressively repurchasing bonds out of cash flow (most of which is contracted). While the embezzlement ratio is on the high side even for the shipping industry, Braxton feels that management incentives are likely to favor noteholders.
 

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Staying In Touch With Braxton Gann

 

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Coronavirus Investing Series: Part 10

This is Part 10 of a special Coronavirus Investing Series. If you have not listened to Part 1, please click here to get the overall context/market overview during this unprecedented time.

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Summary

Eric Schleien and Brian Dress discuss investment opportunities in the bond market. Brian Dress is an investment analyst at Left Brain Capital Management, LLC.  Brian's angle relates to value opportunities his firm is seeing in the corporate and municipal bond markets, based on the massive selloff in credit markets over the past 6 weeks.  Particular discussion points in this episode include:

 

Discussion of Bond Markets Pre-COVID 

Brian thinks the spreads were far too tight which made it very difficult to position portfolios with income to match future expenses.  Investors were forced to take too much risk to attain yield. This is something we have discussed extensively before on The Intelligent Investing Podcast.

 

How Credit Cycles Work Historically

The main takeaway here is that credit booms and busts occur far more often than do booms and busts in the equity markets.  Savvy investors should be willing to take risks on bonds in trough phases like this one and gradually lighten the load as spreads tighten, creating the capacity to take advantage of the next down cycle. 

Note: high yield bonds have led stock recoveries after every market drawdown since 1980 (1982, 1991, 2002, 2008-9, 2016) 

 

Observations In Credit Markets 

Brian has noticed indiscriminate selling related to a liquidity crunch, causing bonds at all levels of credit quality to sell off heavily.  Brian believes this creates fantastic opportunities across the credit spectrum, which he and his company are taking advantage of to reposition clients. I discuss that in regards to all markets, here.

 

COVID-19 Gameplan 

Brian is upgrading the credit quality of bond portfolios, taking the opportunity to lock in large coupons on stable companies, some of which continue to trade at a discount. Markets have been starved for these types of opportunities in the bond world and, while many of these have already narrowed, plenty of mispriced securities are still out there for investors.  There are still chances to lock in great coupons, along with the potential for capital appreciation.  Brian believes it is important to recognize that it is likely we will be in a 0% interest world for the foreseeable future.

 

Bond Opportunities

After Eric and Brian discussed the general overview/strategy with respect to bonds, Brian presents a few examples where he sees opportunity.

  • Qurate (QRTEA) 8.25% 2030 bonds (Yield to maturity >12% at current price levels)
  • Travel and leisure: Delta 4.375% 2028s (yielding >7% at current prices) and Carnival Cruise (unsecured 2020s and secured 2023s)
  • Illinois Municipals General Obligation 5.1% bonds: effective yield of more than 8% for those in highest tax bracket, possible appreciation potential with interest rates now firmly at 0.

 

New Service

Brian is debuting a new service next week at Left Brain Investment Research, which is a twice-monthly pay-per-view Zoom call for investors of all types, where his firm will be introducing a single bond idea and a single stock idea each month and explaining the entire research process that went into those recommendations.  

Brian has his firm's “shelter-in-place” specials available on his firm's website

Listeners can enter the promo code “Eric” on the subscribe page and receive a full research service (stocks and bonds) for $99/month for the life of the subscription. 

***FULL DISCLOSURE, I, Eric Schleien, DO NOT MAKE ANY MONEY OFF THIS PROMO CODE. ALL SAVINGS GET PASSED BACK TO INTELLIGENT INVESTING PODCAST LISTENERS.

 

LBIR Investment Ideas Forum

Second, Left Brain Research has its LBIR Investment Ideas Forum with the first two installments coming on April 30 where Brian and his firm will discuss a stock idea with the same format.  Listeners can find all the information for these events on the front page of the LBIR website.

 

 

About Left Brain

Left Brain opened the wealth management business in 2014, a hedge fund in 2016, and an investment research platform in 2019. A differentiating characteristic of Left Brain's investing platform is an emphasis on selecting individual securities, particularly individual bonds in the high yield space. Brian genuinely enjoys and gets excited to share his investment philosophy with both individual investors and advisors.  The company has slowly built up its investment staff in order to cover a large universe of high yield bonds (about 900) and about 200 stocks.  What they've come to realize is that many advisors lack the resources to replicate this type of research apparatus, so they decided to create a product to provide this research to advisors so that they can select stocks and especially high yield bonds that will help clients achieve income goals in a compressed interest rate environment.

Data-Driven Bottom-Up Approach

Left Brain has a data-driven, bottom-up approach that incorporates technology to rank securities on the basis of a number of quantitative and qualitative factors, including revenue growth, gross margins, competitive dynamics, and accelerating results. The company portfolios are concentrated, as they view this as an allocation model with the best chance to deliver superior results and excess returns; usually no more than 20-25 stocks at any given time, particularly in the hedge fund.

 

Management

Company management is paramount in both equities and credit.  Left Brain wants to see a history of success for the CEO, a strong capital allocation strategy, and an alignment of interests with investors (“skin in the game”); also for equities and bonds, they want to see strong fundamentals in the underlying business, no matter what the valuation or possible yield compensation

 

Equities

The company looks for strong (and accelerating) revenue growth, high (and expanding) gross margins, favorable competitive dynamics

 

Distressed Bonds

For distressed bonds: Left Brain looks for deleveraging (either through improved EBITDA or retiring debt through asset sales), improving trends in operating metrics (revenue, EBITDA, total debt), high yield compensation per unit of leverage (Debt/EBITDA), and most importantly, a strong Free Cash Flow (FCF) profile.

 

Staying In Touch With Left Brain Investment Research

  • Click here for more information on Left Brain Investment Research
  • Click here for more information on Left Brain Wealth Management

 

Staying In Touch With Eric Schleien

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