Finally got my entry price into Fallen Angel Bed, Bath, and Beyond.

music selection:  “I Am The Walrus” — The Beatles

Fallen Angels are companies that get downgraded from investment grade to junk.  I outlined the opportunity in Bed, Bath, and Beyond (BBBY) in March.  The company is in the midst of a turnaround that is sure to send their bonds back to par in the next 24 months.  The great thing about the bonds of these Fallen Angels is there is forced selling.  Many institutional bond holders (most bonds are held by institutions) become legally obligated to sell when their holdings get downgraded.  This forced selling creates some irrationally low pricing.  That is your buying opportunity!

I have had a Good Til Canceled order open on CUSIP 075896AB6 since late march at 76.0000 cents on the dollar.  On 21MAY2019 my order filled and I became the proud owner of 9 units of the 4.915 coupon 1AUG2034 maturity BBBY bonds.  Held to maturity, this bond has an annualized  yield to maturity of 8.54%.  That is a fair priced to be paid to wait for capital gains as the turnaround story plays out.  If the turnaround sends the bonds back to par in 24 months as projected, the annualized return jumps to 22.17%.  That is better than being an equity investor 99% of the time and comes with reduced risk.  This is how I increasingly want my portfolio to be invested as I can find these opportunities.  And there will be plenty of opportunities when the credit cycle finally turns (it always turns – it is called the Business Cycle).

ACTION TO TAKE:  Buy CUSIP 075896AB6 up to 76.0000 cents on the dollar.  Sell when the bond returns to par.

Devour your prey raptors!

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2 thoughts on “Buy 075896AB6

  • May 24, 2019 at 3:23 pm
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    BBBY seems like a long-term loser to me. They purposely don’t disclose what percent of their revenue comes from wedding and baby registries (they also run BuyBuyBaby), but I suspect that it’s high. The prices are high in both stores and Amazon is edging in on both registries. I don’t know anyone who visits these places other than to buy an item on a registry or to create a registry.

    More fundamentally, the folks who register at these places are statistically getting married less and having kids less. I would view BBBY’s existence in 15 years as slightly uncertain and I don’t think the ~6.5% collected each year is enough to justify the risk inherent in those bonds. This trade will probably work out, but why take that big of a risk to just achieve an average market return?

    I agree it’s a better deal than the equity, but it just seems like a reach to me.

    Reply
    • May 24, 2019 at 6:24 pm
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      You make good points. And for sure the underlying equity is NOT a buy here. The bonds are a different story because the outcome is binary. You can read my March 22 post to see how management is addressing the turnaround and the Amazon threat. I think it will trade near par within 18 months or so if management is effective. If the price lingers around the mid 70’s I may exit at that time, content to have collected some nice coupons with little downside risk. Thanks for reading Steve!

      Reply

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