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Strategies & Market Trends : Value Investing
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To: Tapcon who wrote (21648)7/10/2005 12:21:33 PM
From: E_K_S  Read Replies (1) of 78763
 
Hi Paul - Here is the Yahoo link for the ABS preferred hybrid shares. ( finance.yahoo.com ).
You can see that the preferred tracks the common.
The difference in price is due to the larger dividend paid out by the preferred. By May 2007, the two prices should be equal.
(http://finance.yahoo.com/q/bc?t=1d&s=ABS-P&l=on&z=m&q=l&c=abs )

The preferred security began trading 4th qtr 2003 and traded as high as $26 and got as low as $22 in Jan 2005.

Remember this asset has two components (1) a bond type income stream and (2) an equity conversion component. Each unit can be converted into common shares (based on the exchange conversion ratio) which is determined by the 20 day MA price of the common stock.

This investment strategy only works if you think ABS's management can complete their restructure and both sales and earnings begin to grow. The common stock price must be greater than $22.50 to break-even. You earn close to an 8% dividend yield ($0.45/qtr) which is “qualified” (double that of the common) while you wait. In May 2007 all units convert into common shares at a small discount to the market price.

There are six quarterly payments left on the hybrid bonds and then the premium to the common stock approaches zero.
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I have been wrong in the past and will be wrong in the future so it is possible that this strategy may not work as expected. I realized that "IF" a turnaround works, it would take time (more than 24 months). Here you get a large qualified dividend while you wait and lock in a common equity conversion option at or near 10 year lows.

EKS

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