angusthermopylae (42.98)

Owning "Crap"

February 01, 2009 – Comments (2) | RELATED TICKERS: BHY , CHK , DTV

or..."Is All Garbage Equal?"

[Disclaimer:  I'm writing about stocks I own, have owned, or probably will own...if they ever look good again.  However, and I must stress this, this is not a "pump and dump," a paid advertisement, or even a plea for someone to hold my hand in the scary world of Financial Doom.   To be honest, I'm not even a "believer" who demands that everyone "BUY THIS STOCK NOW!!!" 

I'm not looking to get uber-rich over night, and I certainly wouldn't want someone to buy something on my say-so alone.

I may be wrong, but I'm thinking that there are a lot of people out there who may find themselves in a similar position, and maybe this article will help.]

Ok, so we've all heard about the "toxic assets."  First, it was "These assets are going to bring down the whole economy!!! OMG!! Ponies!!!" (courtesy of our former Bernanke & Co.)

So, everyone jumps through hoops, Congress coughs up the first half of a $700 billion bailout, and then Fearless Leaders (Bernanke & Co, again) don't do anything directly about the assets...

Now, suddenly it's all about the toxic assets...again.  "Bundling", "tranches", "over leveraged", and all sorts of  weird phrases have entered the social conscious; usually, divided between those who feel they need to be "dealt with," and those who believe that anyone stupid enough to base their finances on these things deserve what they get...

Your Point?

Which got me thinking...that sounds like something I'm involved in.  So, I did some research on a stock I've owned, off and on (and, to be honest, currently do own), and realized that I'm just as bad...or am I?

[cue Rod Sterling]  For your consideration, Black Rock High Yield Trust (BHY), a minor player in one investor's portfolio, but indicative of a tortuous world of risk and debt....

What it Claims to Be

If you go to the Black Rock page for the fund, you'll see BHY described in the following terms:

"The BlackRock High Yield Trust, BHY, commenced operations in December 1998 with the investment objective to provide high current income and to a lesser extent capital appreciation, by investing in a diversified portfolio of below investment grade securities."

Wow...what a downer:  "below investment grade securities."  Sounds a lot like the toxic mortgage assets, doesn't it?  In today's world, wouldn't you want to own something that's safe?  Looking at the CAPS blogs, it seems like everyone is arguing over how much gold to buy---why would anyone want to purposely investing in...well, crap?

Looking Under the Hood

Following the "Literature" link bring up, among other things, the August 2008 Annual Shareholder's Report.  Page 6 has some overall data:  Net Asset Value (NAV) has dropped from the year before, ang a good 52% of the assets are rated B at best...ouch!

Going on to pages 27 and 28 show the dirty details.  I won't belabor the listing, but, basically, it's corporate debt...lots and lots of paper that companies put out, promising to repay in the future.  Some of the debt is  coming due in the near future (won't that be interesting?), and some is due as far off as 2028...will the company even be around then?

Is this Smart?

Honestly, that's my question.  For example, some of the debt is in Chesapeake Energy (CHK).  That company is pretty well known for having a crappy year...as far as stock goes.  On the other hand, the also have cash on hand...and, short of a buyout from a mega multinational, are sitting in a fairly good position to survive in the long run (for now, at least.)  I own that stock, and now, apparently, I also own a teeny, tiny portion of their debt....

Then there's Echo Star (DISH) and DirecTV (DTV).  One company has had an "ok" year, the other has been pummeled.  About equal amounts of both.  I'm familiar with the Tivo case that DISH lost (following the news), so it's not surprising that they are hurting.  But, even if DTV wipes out DISH as a company, the best you can hope for with BHY is a draw---BHY has about equal amounts of both companies' bonds..

What to Do, What to Do...

To be honest, I started buying BHY as a "safe harbor"...a place to drop my cash when I didn't have anything else to buy.  At 12-13% APY, it was a lot better than a savings account, and my particular brokerage let's me buy and sell fairly easily.

On the other hand, the price itself has gone down significantly...from a high of about $12 per share to the current state of $5.00.  If a portion of the underlying companies go under, the stock price could be hit even harder.

If you asked me over the last 5-6 years, I would have honestly said that BHY had risky assets...and never given it a second thought.  The fund hasn't vaporized, and I haven't held any over a significant long term to be really damaged by the drop in price.  Usually, money will sit there for 2-4 months while I scope out another stock or 3 to purchase.  That comes out to about 2-4% "growth" over the short term, using a DRIP...

One of the basic tenets of Fooldom (from way back) was to split your assets based on 1) what you wanted to do with your money (steady income, retire in 50 years, get rich overnight) and 2) what your risk tolerance is.  I feel that I'm fairly risk-tolerant, and, since I'm not betting the farm (literally...I can look out my window and see my goat herd), a payoff is going to help, but a big loser is not going to cripple me.

So, here's where I need help, Fellow Fools:  Am I being an idiot?  There are too many companies for me to really know in detail (without putting in an exhorbitant amount of time in research...I can "get smart" about a lot of things, but my eyeballs start to swim after too many financial statements....)  Also, while I think I understand the underlying finances of this kind of trust, I'm pretty sure that there are some details that can really bite me in the ass-ets.  For example, the August 2008 NAV was listed at $6.84 while the market price was $5.96.  The current NAV is listed at $4.54, while the market price is now $5.00--they've reversed positions.  How bad is that?

BHY has been fairly safe for me, but now I'm not so sure.  Too many companies are at risk, and the time frame is too long to really, honestly believe that every company there will survive to pay off the debt.

On the other hand, I get automatic diversification--lots of industries that I would never look into on my own...it violates the "invest in what you know" tenet, but also spreads the pain.  And, in CAPS, my BHY green thumb is doing pretty well...not amazing, but steady and safe.

But that brings up the question about these types of stocks in general.  Buying a "diversified portfolio" can mean that you suffer everyone's pain in bad times...like now, perhaps?  And, in times like these, I'm pretty sure that most people would not want to own bad assets...in any form.

Remember that old story about optimism?  This two kids are show a huge pile of horse manure.  One kid says "Phew!  That stinks--I'm not going near it!"  The other kid starts digging into the pile, saying "With a pile this big, there must be a pony in here somewhere!"

Me, I'd just say, "Hmmm....my garden needs fertilizer.  Where's the shovel?"