Up From Junk
STOCK SCREENS • From S&P
By Numer de Guia, CFA
This week's screen finds 15 names whose upgraded bonds strongly imply their stocks might be well worth a look
While the name of this column is Stock Screens, we'd like to talk about bonds for a moment -- specifically, the significance of a company's credit rating. Don't worry, we'll get to the stocks part later.
Corporate credit ratings fall into two main categories -- speculative grade or "junk", and investment grade. A bond that has a credit rating of less than BBB- from Standard & Poor's Ratings Services is considered speculative grade. Speculative-grade issuers usually have questionable track records, or have experienced significant events that undermine their ability to pay interest and principal. Companies that are small in size or lack an established operating track record are also likely to be considered speculative grade.
On the flip side, bonds rated BBB- and above are considered investment grade, a category to which certain investors, including many pension funds, confine their bond holdings. These issues are considered to have superior financial strength to their junk-rated counterparts.
VITAL SIGNS. It stands to reason, then, that a company whose credit rating has been boosted from junk to investment grade has seen improvement in its creditworthiness -- and in financial health.
That was the impetus behind this week's screen. We started out by looking for those companies which have had their S&P senior debt ratings lifted to investment-grade (i.e., at least BBB-) in 2004. (It must be emphasized here that S&P credit ratings are a measure of a company's ability to repay principal and interest on its debt, and not an indication of its merits as an investment.)
Then we looked for issues with an investment ranking of 3 STARS (hold), 4 STARS (buy), or 5 STARS (strong buy) from analysts at Standard & Poor's Equity Research Services. When we ran the numbers, 15 names emerged:
Making the Investment Grade
Company Ticker S&P STARS Rank
Adecco ADO 3
Briggs & Stratton BGG 3
Capital One COF 5
Coventry Health Care CVH 3
Dana Corp. DCN 3
Fisher Scientific FSH 4
Hasbro HAS 3
Louisiana-Pacific LPX 3
PacifiCare Health PHS 5
Pioneer Natural Resources PXD 3
Vivendi Universal V 4
Whole Foods Market WFMI 3
XTO Energy XTO 3
Yahoo! YHOO 4
Yum Brands YUM 3
businessweek.com
[Harry: YHOO bonds are junk status??] |
