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September 17, 2019
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Turnaround investors must be especially wary of trendy sectors. Recently, this has been demonstrated by the dramatic implosion of several “green” energy companies, including wind and solar energy providers. We’ve seen dramatic falls from grace many times before. A few stocks, or a whole sector, catch the public’s fancy. Share prices skyrocket…only to come crashing back to earth a few months or quarters later. Solar power is simply the latest in a long list of fashionable sectors—after telecom, Internet and theme-based dining, to name just a few.

There is an old saying in the investment business: “You can always tell the market-timers: they’re the ones with the holes in their shoes.” While there may be cycles in the stock market, The Turnaround Letter doesn’t know anyone who can successfully time those cycles, so our stock market advice for turnaround investors is not to attempt market timing.

Convertible bonds are an attractive vehicle for investors who want equity-like returns but cannot bear the volatility of stocks. A convertible may also provide more current income than the underlying stock. A convertible bond is a bond that can be exchanged for stock at a certain price ratio. As a bond or a debt obligation of the company, the convertible pays you interest periodically and then pays you back your principal at maturity even if the stock declines in price. It also gets paid off ahead of the stock if the company files for bankruptcy. These bond-like characteristics usually keep the convertible from falling too far if the company has poor results.

With investors’ faith in the long-running economic expansion and bull market being tested, we thought some comments on high yield bonds would be of interest to turnaround investors. Companies with these bonds, sometimes referred to as “junk bonds,” often are, or probably should be, in turnaround mode. And, if the companies eventually file for Chapter 11 bankruptcy, they can provide appealing distressed bond or post-bankruptcy stock opportunities. Given their riskier nature, high yield bonds tend to behave more like stocks than other, higher quality bonds.