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The Federal Reserve is now buying junk bonds, and analysts at Jefferies argue that presents an opportunity for investors to load up on shares of leveraged companies that are out of favor.
The Fed expanded its Secondary Market Corporate Credit Facility on April 9. The Federal Reserve Bank of New York, the largest of the Fed’s 12 district banks, will buy up to $750 million in corporate bonds. Most of the purchased bonds will have investment-grade ratings of at least BBB-/Baa3 (minimum investment grade ratings of Standard & Poor’s and Moody’s, respectively).
But the central bank made a big splash by saying the New York Fed will also purchase bonds recently downgraded from investment grade ratings as of March 22 or later that are now rated at least BB-/Ba3. More importantly, the Fed said it will purchase shares of exchange traded funds “whose primary investment objective is exposure to U.S. high-yield corporate bonds.”
You can read the Fed’s entire description of the corporate buying program here.
Read:Fed’s Clarida says there is nothing fundamentally wrong with the economy
This is a “game changer,” according to Jefferies equity strategist Steven DeSanctis, “as stocks that have leverage were being treated as if they were going out of business and were hammered regardless of how well or poorly their forward prospects looked.”
In a note to clients on April 12, DeSanctis and analysts at Jefferies listed 18 stocks they believe “were beaten up but have the wherewithal to make it to the other side” of the coronavirus recession.
Investors already reacted to the Fed’s announcement by sending the iShares iBoxx $ High Yield Corporate Bond ETF HYG, -1.44% up 6.5% to close at $82.36 on April 9. (The stock market was closed on Good Friday, April 10.)
HYG pays a monthly dividend and has a yield of 5.31%, which compares to a yield of 3.14% for the iShares i Boxx $ Investment Grade Corporate Bond ETF LQD, -0.94% and 2.04% for the Vanguard Intermediate-Term Treasury ETF VGIT, -0.10%.
Highly leveraged companies rated ‘buy’
DeSanctis and equity analysts at Jefferies listed 18 “levered names that could be misunderstood by the market” that are also rated “buy” by the firm, in a note to clients on April 12. Here they are, with 2020 performance and debt-to-equity ratios, according to FactSet:
| Company | Ticker | Long-term debt/ equity | Total return – 2020 through April 9 | Dividend yield – current | Industry |
| Acadia Healthcare Company Inc. | ACHC, -5.08% | 58.5% | -31% | 0.00% | Medical/Nursing Services |
| Aptiv PLC | APTV, -2.29% | 50.0% | -34% | 1.41% | Auto Parts: OEM |
| Berry Global Group Inc | BERY, -2.66% | 85.4% | -21% | 0.00% | Containers/Packaging |
| Capri Holdings Ltd. | CPRI, -2.61% | 41.2% | -65% | 0.00% | Apparel/Footwear Retail |
| Federal Realty Investment Trust | FRT, -3.05% | 56.9% | -33% | 4.88% | Real Estate Investment Trusts |
| Floor & Decor Holdings Inc. Class A | FND, -4.19% | 54.1% | -28% | 0.00% | Home Improvement Chains |
| Foot Locker Inc. | FL, -7.68% | 48.4% | -35% | 6.40% | Apparel/Footwear Retail |
| Freeport-McMoRan Inc. | FCX, +1.22% | 51.7% | -37% | 0.00% | Other Metals/Minerals |
| Hologic Inc. | HOLX, -0.36% | 52.6% | -21% | 0.00% | Medical Specialties |
| LyondellBasell Industries NV | LYB, -1.45% | 59.4% | -37% | 7.13% | Chemicals: Specialty |
| ON Semiconductor Corp. | ON, +3.49% | 42.2% | -44% | 0.00% | Semiconductors |
| Parker-Hannifin Corp. | PH, -4.29% | 50.9% | -29% | 2.42% | Industrial Machinery |
| Sealed Air Corp. | SEE, -4.28% | 101.5% | -22% | 2.08% | Containers/Packaging |
| Sysco Corp. | SYY, -5.18% | 71.6% | -41% | 3.63% | Food Distributors |
| Williams Companies Inc. | WMB, +3.07% | 56.7% | -28% | 9.64% | Oil & Gas Pipelines |
| Wyndham Destinations Inc. | WYND, -0.56% | 104.5% | -55% | 8.66% | Timeshares |
| Wyndham Hotels & Resorts Inc. | WH, -6.64% | 63.0% | -45% | 3.73% | Hotels/Resorts/Cruiselines |
| XPO Logistics Inc. | XPO, -6.62% | 67.9% | -22% | 0.00% | Trucking |
| Source: FactSet | |||||
You can click on the tickers for more about each company.
You will have to scroll the table to see all the data, including dividend yields and industry groups.
If you see any stocks of interest here, you had better do your own analysis to form an opinion of a company’s ability to remain competitive for the next decade, while also considering the viability of its industry group, before making a long-term commitment.
