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George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.

High Yield Bonds / Post-Bankruptcy Stocks

High Yield Bonds: Time for Even More Caution

Excerpted from February 2013 Issue

February 8, 2013

From time to time we comment on high yield bonds (sometimes called “junk bonds”) because they are akin to turnaround stocks in several ways. While they are called bonds, many high yield issues have return--and risk--characteristics closer to stocks than to other fixed income instruments. Also, many companies that issue high yield debt are in the process of turning around, or at least trying to. Some high yield  issuers don’t make it, file for Chapter 11 and eventually provide interesting post-bankruptcy stock potential turnaround opportunities.                   

Last year at this time we urged caution in approaching high yield bonds, but our concerns proved to be unfounded as high yield had a very strong year in 2012. As measured by the Bank of America Merrill Lynch High Yield Master Index, junk bonds gained an average of 15.4% last year. In our defense, we did say “Maybe the high yield market can squeeze out another decent year before things head south…”

This year we urge even more caution towards high yield bonds. The yields on junk bonds are at record low levels--below six percent--and we believe that at those levels you are not being adequately compensated for the risks you are taking. The risks in high yield bonds right now come from a couple of different sources (learn more about those risk sources).

While it’s not certain that  the risks will materialize this year, we feel that the longer the current boom in high yield continues, the greater the risk of negative surprises. As we said above, at current low yields, holders of junk bonds are not getting adequately compensated for that risk.

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George Putnam's Favorite Stocks for 2016

stock picks

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2015 Bankruptcy Recap: 46% Increase Fueled by Oil & Gas/Mining Industry--Further Uptick Predicted

Looking back at 2015, research reveals a 14% decline in overall business bankruptcies but a 46% uptick in public company Chapter 11 filings—with a striking 51% of those filings coming from the battered Oil & Gas/Mining sectors. Economic indicators point to further increases in corporate bankruptcy, in general, and Energy-related filings, in particular. Just a few days into 2016, this viewpoint has already been validated by Arch Coal's long-awaited $8 billion Chapter 11 filing—and continuing oil price plummets severe enough that OPEC will likely convene an emergency meeting to address "shattered" economies. Read More.

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Spotlight: Junk Bond Market

stock market advice

MarketWatch's Mark Hulbert recently tapped George's distressed investing expertise to determine the fate of the junk-bond market and what its nearly three-year decline likely means for your portfolio.

 

Hulbert writes, "What’s really going on? For insight, I turned to George Putnam, an expert in distressed-company investing. His Turnaround Letter advisory service has handily beaten the stock market over the past 15 years, according to the Hulbert Financial Digest’s tracking, by an impressive margin of 7.3 percentage points a year on an annualized basis."

 

Commenting on the rapid growth of high-yield exchange traded funds (ETF's), Putnam notes, "They have become the investment vehicle of choice for short-term investors….Those investors tend to be trend followers and, therefore, are just the opposite of being contrarian."

 

Read the full MarketWatch junk-bond article to find out what George thinks these recent indicators likely mean for future distressed investing profit.