Please ensure Javascript is enabled for purposes of website accessibility

Be the Next Junk Bond King

By Toby Shute - Updated Apr 5, 2017 at 7:53PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Distressed debt is looking delicious.

Stock jockeys aren't the only ones salivating at securities prices these days. High-yielding corporate debt has traded down to tempting levels as well. I've never dabbled in debt, but I'm beginning to sniff around the space.

Various products allow you to invest in debt -- either an individual issue or a cross-section of them -- just as you would a share of common stock. For below-investment grade -- aka "junk" -- bonds, there's the iShares iBoxx $High Yield Corporate Bond (NYSE:HYG) ETF and the SPDR Lehman High Yield Bond (NYSE:JNK) ETF. Here's more on the former fund.

There are also closed-end funds, which can produce extra juice if you buy them at a discount to net asset value. Many of these discounts have snapped shut since fellow Fool Dan Caplinger took a look last month, but the Dreyfus High Yield Strategies Fund (NYSE:DHF) value gap is still fairly wide.

Whether you opt for an exchange-traded fund or a closed-end fund, both provide a convenient way to pick up a diversified basket o' distress. Corporate defaults are definitely headed higher, but the firms that survive ought to generate returns that are fabulous enough to outweigh the zeroes. That's all the more true if you buy during another dramatic sell-off akin to what we saw in early October and late November.

If you're bearish on the broader economy, or your inner stock picker urges you to hone in on individual securities, there is another easy way to dip a toe into this part of the market. There's a fair amount of debt out there that's listed on a stock exchange and traded just like stock. The usual denomination for these notes is $25, so you'll see them trading around that price in normal times -- remember those?

General Motors (NYSE:GM) has exchange-traded debt priced at around $3, or a dozen pennies on the dollar. But that discount isn't altogether unreasonable, and it’s not really the kind of opportunity I'm thinking about.

More interesting to me are cash cows like Comcast (NYSE:CMCSA) and CBS (NYSE:CBS). Comcast, the largest cable company in the country, has a note (ticker: CCS) trading below 80% of par. Viacom (NYSE:VIA) spinoff CBS has two issues (tickers: CPV and RBV) trading around $0.50 on the dollar. That is pretty astonishing for an investment-grade credit.

I know both companies are likely in for a rough 2009, but visions of default do not dance before my eyes.

Related Foolishness:

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds. They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool PRO and to receive a private invitation to join, simply enter your email address in the box below.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool's disclosure policy is indebted to no man.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Paramount Global Stock Quote
Paramount Global
PARA
$25.21 (3.92%) $0.95
General Motors Company Stock Quote
General Motors Company
GM
$37.56 (4.16%) $1.50
Dreyfus High Yield Strategies Fund Stock Quote
Dreyfus High Yield Strategies Fund
DHF

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.