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Best Investments 2021


BondSavvy has presented five new corporate bond recommendations, including four on the December 17 edition of The Bondcast, our subscriber-only bond webcast, and one more on December 18.  We believe these investments have upside that can drive strong total returns and be among the best investments for 2021 and beyond.

Given the strong performance of many corporate bonds this year, finding value has become more challenging than it was in the depths of the COVID-induced market crash in March.  The run-up has been so significant that the weighted-average price of corporate bonds held in the $50 billion iShares LQD corporate bond ETF was 118.67 on December 14, a significant premium to par value.  Of our five new bond recommendations, two were priced in the 80s, two in the 90s, and one slightly above par.  Investing in bonds at low prices is one of the many advantages of investing in individual bonds vs. bond funds.  While there could be a bond priced at 118.67 that is still a good value, we don't believe investors are well served investing significant amounts of money in a bond fund priced at such high levels.

Given the ceiling on bond prices, we prefer to buy bonds trading at a relative discount, which can increase in value and achieve strong total returns.  Investors who buy overpriced bond funds -- such as the iShares LQD corporate bond ETF -- limit their upside.  In addition, since capital appreciation will be hard to come by when buying in at a weighted-average price of 118.67, we expect the after-tax returns of such large corporate bond funds to be poor in 2021, as we expect the bulk of 2021 bond fund returns to come from interest income rather than capital appreciation.  Given the favorable tax treatment of capital gains vs. interest income, we seek to identify corporate bonds where capital appreciation can constitute a significant portion of a corporate bond's total return.  Greater tax efficiency is another advantage of owning individual corporate bonds vs. bond funds.

To begin each edition of The Bondcast, we review the overarching investment themes informing our recommendations.  For our December 17 recommendations, these investment themes included the following: 

Investment Theme 1: Focus on bond issuers that have performed well through COVID-19.             
 
As shown below in Figure 1, we recommended corporate bonds across four industries: technology, infrastructure, natural resources, and media.  In the wake of COVID-19, there are many companies whose revenues fell 50% or more, often with hundreds of millions to billions in red ink.  While two of our issuers saw year-to-date EBITDA declines vs. last year, the declines were in the single digits.  We believe companies that faced unprecedented challenges in 2020 re-tooled their businesses and are well positioned for a successful 2021.  Companies that faced these challenges but limited EBITDA reductions to less than 10% adapted their businesses for the 'new normal' and are the types of companies whose bonds we like to own.

Investment Theme 2: Own a mix of investment-grade and high-yield corporate bonds.             

Our newly recommended corporate bonds included two bonds rated investment grade and three rated below investment grade (aka high-yield corporate bonds).  We believe investors should own a variety of corporate bonds.  This includes bonds of different maturities, credit quality, and industries.  

While we have been outspoken as to the many weaknesses of corporate bond ratings, owning both investment-grade and high-yield corporate bonds is important, as we want our bonds to be driven by different factors.  Investment-grade corporate bond prices move, in large part, based on changes in US Treasury yields and credit spreads.  High-yield corporate bond prices are impacted by changes in a bond issuer's credit quality and are typically not materially impacted by changes in Treasury yields.  Both investment-grade and high-yield corporate bonds are impacted by bond fund inflows and outflows, which create forced buying and selling, which can impact bond prices.  

As shown in Figure 1, Bond Recommendations 1 and 2, both rated investment grade, had YTMs of around 2.50%.  While these yields will not knock most investors' socks off, our investment performance has shown how long-dated investment-grade corporate bonds can significantly increase in price and achieve strong total returns.  While the YTMs of many investment-grade corporate bonds are currently low, there are a select number of bonds that we believe still represent compelling values relative to other bonds.  These are the corporate bonds we seek to identify for our BondSavvy newsletter subscription customers.                    

 

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Investment Theme 3: Focus on corporate bond issuers with low leverage ratios.

Based on the recent performance of the US stock market, many might believe that the US economy is running on all cylinders.  Recent corporate earnings reports, however, tell us the US economy has a long way to go.  Companies across many industries have been hit hard by the COVID-19 pandemic.  While many companies have been turning the corner, one quarter does not a trend make.

In light of where we are in the economy, we continue to focus on bonds whose issuers have low leverage ratios, which are a company's total debt divided by its trailing twelve months' EBITDA, or earnings before interest, taxes, depreciation, and amortization. In the case of the bonds recommended December 17, the highest issuer leverage ratio was 3.1x. Investors should know that we do not look at leverage ratios in a vacuum. Rather, we evaluate leverage ratios, interest coverage ratios, and other credit metrics in the context of our comprehensive investment analysis.  This includes capital allocation, financial performance trajectory, industry sector, level of upcoming bond maturities relative to a company's cash balance and profitability, and a number of other investment considerations.

Investment Theme 4: Successfully manage the call features of recommended bonds             

Call schedules can be a corporate bond investor's friend or foe.  Two of our recommended corporate bonds are subject to call schedules, which can limit a corporate bond's upside and return opportunity.  Generally speaking, bonds with investment grade bond ratings when issued are not subject to call schedules.  They are, instead, subject to make-whole-call provisions, which are seldom invoked and favor the bondholder, as the bondholder must receive the present value of all future interest and principal payments for the bond to be called prior to the maturity date.

On the other hand, bonds initially issued with bond ratings below investment grade are typically subject to call schedules where bonds may be redeemed at a specific call price on a specific call date.  While two of our recommended corporate bonds are subject to call schedules, the initial call prices are well above the current price of the recommended bond.  Should the bonds be called on their initial call prices and dates, it would result in strong returns for BondSavvy subscribers who followed these recommendations.

As we update our bond picks every quarter, we pay close attention to the call provisions of each recommended bond and update our buy/sell/hold recommendations accordingly.  Read Item 5 of our when to sell bonds blog post to learn more about callable bonds.                    

Investment Theme 5: We expect a continually dovish Federal Reserve.             

Recently, the Federal Reserve has been buying approximately $80 billion in US Treasurys each month.  Based on a recent Fed statement, we expect these purchases to continue well into 2021.  We expect these purchases -- and other potential actions -- to keep a lid on US Treasury yields.  The continued bond buying by the US Fed and its commitment to keep the Fed Funds rate low gave us comfort to recommend long-dated investment-grade corporate bonds, which can be negatively impacted if Treasury yields were to spike.  That said, a spike in yields can always happen.  If it does, we would expect to buy more of the newly recommended investment-grade corporate bonds at better values than we saw today. 

 

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With the foregoing investment themes in mind, we evaluated hundreds of corporate bonds to identify what we believe to be the best investments for 2021.  Our investment analysis resulted in BondSavvy recommending five new corporate bonds, which we summarize in Figure 1.  Purchase a newsletter subscription to BondSavvy to see the specific bonds (along with their CUSIP numbers) we recommended, our rationale for each investment, and key financial and operating information on each bond issuer.  You will also gain access to all prior BondSavvy recommendations and be the first to learn new recommendations coming in 2021.  

 

Figure 1: Summary of BondSavvy's New Corporate Bond Recommendations 




Industry
      Offer
Price
     
YTM
    Leverage
Ratio



Bond Recommendation 1          
Technology  
96.20 

 
2.40%

 
0.2x



Bond Recommendation 2
Infrastructure  
98.55 

 
2.57%

 
3.1x



Bond Recommendation 3*
Natural Resources   
83.00 

 
13.98%

 
2.3x



Bond Recommendation 4* 
Natural Resources  
87.75 

 
13.51%

 
2.3x



Bond Recommendation 5 
Media / E-commerce  
101.88 

 
5.80%

 
3.1x



* Bond recommendations 3 and 4 were issued by the same issuer.

 


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andy commented on 03-Jan-2021
If your bond picks are as good as you say they are, your should start a bond fund .. small investors who buy then sell individual bonds get cream-ed by bond sellers, on both the buy-side and the sell-side
steve commented on 03-Jan-2021
Andy, that might have been true 25 years ago, but corporate bond markets for retail investors are now nearly all electronic and much more efficient than you might think. Approximately 9,000 individual corporate bonds are available to be traded every day, and, typically 6-10 dealers provide live quotes for each bond. This keeps bid-ask spreads reasonably narrow. For more, click "Learn" on the website menu and then "Corporate Bond FAQ" from the drop-down menu. You'll then see an article titled "Where Can I Buy Corporate Bonds Online?" I'd encourage you to read this article.