This Milestone Should Concern All Investors

Equity investors beware: Last week, the yield on the Merrill Lynch High Yield Index II hit an all-time low of 6.84%. In plain English, that means junk bond investors are now willing to accept a lower yield than at any time in the past.

They may yet accept less: The market doesn't anticipate an interest rate hike before 2012. Inflows into junk bond funds in the first six weeks of this year already represent roughly half of the 2010 total -- and last year was a good year, with junk bonds returning 15.2% (Want some yield of your own? Dan Dzombak's thinks this high-yield dividend portfolio will beat the market).

Cheap money and risky assets
Does last week's milestone provide firm proof of irrational exuberance? No, but it should certainly raise investors' eyebrows – whether they invest in bonds or stocks. That's because one of the principal factors fueling the rally in junk bonds also propels stocks higher: Cheap money. Through its policy of zero interest rates, the Fed has decimated the opportunity cost of holding risky assets, intentionally spurring speculation.

The equity equivalent of junk bonds
In the equity world, the seven stocks in the following table look like the equivalent of junk bonds: They belong to businesses that have little or no competitive advantage or that are substantially leveraged, and they have experienced a big run-up in share price over the past 12 months resulting in valuations that look stretched. Not a reassuring combination of factors.

Company

Forward P/E

Total Debt-to-Equity Ratio (Latest Quarter)

Boyd Gaming (NYSE: BYD  )

249.0

223%

Ciena (Nasdaq: CIEN  )

157.7

905%

Clear Channel Outdoor Holdings (NYSE: CCO  )

168.3

94.7%

Safeguard Scientifics (NYSE: SFE  )

57.3

38.7%

Satcon Technology (Nasdaq: SATC  )

21.6

486%

Sirius XM Radio (Nasdaq: SIRI  )

38.7

1,550%

United Rentals (NYSE: URI  )

21.9

NM

*As of Feb. 17, 2011, based on next 12 months' EPS estimate. Source: Capital IQ, a division of Standard & Poor's.

Know the shares you own
Let me preempt the critics: I'm not bashing Sirius XM or any other company, and I'm not part of a short-sellers' conspiracy. The satellite radio provider happened to be one of just 14 companies in the Russell 3,000 that showed up in my screen. Screens are a statistical tool and any one of the names in the table could be a false positive (or even possibly all of them) – but I'd require some convincing before owning any of these shares.

Between high-yield bonds and high-yielding stocks, we prefer the latter. The Motley Fool has identified "13 Stocks High-Yielding Stocks To Buy Today."

Fool contributor Alex Dumortier, CFA has no beneficial interest in any of the stocks mentioned in this article. You can follow him on Twitter.


Read/Post Comments (5) | Recommend This Article (13)

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  • Report this Comment On February 22, 2011, at 3:13 PM, Siriusbrit wrote:

    "They belong to businesses that have little or no competitive advantage!!" How could this possibly apply to Sirius? Do you even know why their stock has risen so much? Firstly, Sirius Satellite Radio company is the ONLY satellite radio company in the US. Can you say Monopoly, or maybe you do not understand that concept and that is the best form of competitive advantage! Secondly, the 'run up in the stock price is nothing but a return to where the stock should be before it was 'attacked ' by hedge funds 2 years ago!

    The real 'run up' will come in the next 12-18 Months.....

    Stop using Sirius for 'hits' on your site.

  • Report this Comment On February 22, 2011, at 3:37 PM, Cool700 wrote:

    I'm not bashing Sirius XM or any other company.

    YES YOU ARE.

  • Report this Comment On February 22, 2011, at 4:31 PM, brandonmatthews wrote:

    You say you'd be willing to look deeper. OK..

    Start with the capital structure...

    http://satwavespro.com/2011/02/16/sirius-xm-poised-for-signi...

  • Report this Comment On February 22, 2011, at 8:39 PM, zukerman wrote:

    Your search brought up 14 stocks using the parameters you set.

    Mkt cap 389/mil.-6.4/bil.

    Forward P/E 19-29 excluding SFE=N/A

    Debt/Equity 38-1550

    With the other 8 missing it's hard to tell what it was you were looking for. Looking at the mix that you pulled from your mystery 14 it appears that maybe this is another attempt to slam this stock. The other 5 stocks didn't have the hurdles that we have had either. You expected that some would buy your line of BS, however when you consider out of 3000 stocks you got just 14 with these settings is an insult. Another hack job.

  • Report this Comment On February 23, 2011, at 12:29 AM, ItAintCool wrote:

    EVERYONE! Below is a comment Mr. Dumortier posted on Jan 19th to me when I questioned about his obvious bias against SIRI.

    "Let me add that Sirius shareholders should be very grateful for the amount of coverage that the Motley Fool has given Sirius over the years, coverage which is out of all proportion to the company's economic or financial importance. This is largely because one writer has chosen to follow this stock VERY closely for the benefit of an ardent core group of shareholders."

    My response was to tell him that we didn't need any favors from him, and asked him never to cover SIRI again. Since those who do follow the stock don't need his cherry picking style of slanted journalism that ignores some facts over others. Obviously he's not listening, despite his feeling that SIRI was not really a stock of worth for MF to cover. Certainly there were several other stocks you could have easily mentioned in Sirius-XM's place for this piece? So the question is "Why do it Mr. Dumortier?" And we all know the answer, because without mentioning SIRI in your article, this piece would be completely ignored by everybody online. Name-dropping SIRI is the only way you can guarantee to get web hits.

    You sir, are a hypocrite. You poo-poo about how the coverage of Siri by MF is way out of proportion to it's financial importance, but you continue to use it to your own benefit. You doth protest to not be part of the great SIRI bashing conspiracy with your end-disclaimer, but whenever you mention the stock in your pieces, it is only in the negative.

    I challenge you, if you truly have no agenda for or against Sirius-XM, and since you question its value to be even covered by MF, it should be quite easy for you to eliminate your personal coverage of the stock all-together. But you can't and you won't simply because you need the attention name dropping SIRI gives you.

    Hipocryte = Alex Dumortier

    Prove me wrong!

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