If you're a subscriber to our Motley Fool Rule Breakers newsletter service, the name Vertex Pharmaceuticals (NASDAQ:VRTX) probably conjures up images of happy puppies, dandelion fields, and "Charly Travers for President" bumper stickers. That's because it's one of the three stocks that have more than doubled since being singled out as part of the ultimate growth stock research experience.
That's pretty impressive when one considers that the newsletter has made only 30 stock recommendations so far. Those three winners have helped the newsletter achieve some pretty heady results. The average pick is up 21%, and that's a few times better than the market's average return of 6% in that time.
Well, last night, Vertex announced that it had entered into an arrangement with some of its debtholders to exchange $95 million worth of its convertible senior subordinated notes for 6.7 million shares of common stock. A convertible bond is one that gives the bondholder the opportunity to convert each bond into a certain number of shares of stock.
This will help Vertex to marginally improve quarterly results, since the company won't have to make payments that amounted to 5.75% of the face value of those retired notes. Of course, there is no free lunch. Printing out the new shares translates to shareholder dilution -- as well as a one-time non-cash charge in accounting for the swap.
I like the move. The first step for a company like Marvel (NYSE:MVL) to become a major growth stock was to shore up its balance sheet a couple of years ago by wiping it clean of its burdensome preferred stock.
Convertible shares seem like an attractive way to raise funds at first, since it gives the company the ability to raise capital with a low-yielding instrument. However, if the shares begin to appreciate -- and, clearly, that has happened at Vertex -- the convertible feature of those notes proves to be no bargain for the existing shareholders.
Companies should therefore be careful when they use convertible vehicles as a way to raise money. It's why I sometimes cringe like I did last week, when Home Services of America (AMEX:HOM) and American Oriental Bioengineering (AMEX:AOB) diluted their shares by completing private placements that issued units offering discounted shares and warrants.
Obviously, the existence of convertibles shouldn't be a deal-breaker when looking for great investment ideas. Companies like Marvel and Vertex have done just fine over the years. I have fond memories of Iomega (NYSE:IOM) convertibles, too, in the go-go 1990s. Still, it's something that I would rather not see, given the choice.
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Marvel is a Motley Fool Stock Advisor recommendation.
Longtime Fool contributor Rick Munarriz finds that eating, sleeping, and breathing growth stocks will work wonders for your financial health. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
