Dear Mr. Berko: We have a $262,000 portfolio that yields 5 percent, and we need those dividends to live on. Recently, our stockbroker had us take some profits and losses, and now we have about $60,000 in cash to invest. He recommended an annuity that would pay us 5 percent. But we've decided to take a big gamble to improve our return. We want to invest $30,000 in three aggressive stocks that you think can increase by at least 50 percent in the coming 18 months. Because aggressive stocks don't pay dividends, we want you to recommend a quality junk bond yielding 10 percent, where we will invest the other $30,000. This will produce a 5 percent overall yield on our $60,000, and we need this income. We plan to sell the aggressive stocks and the junk bond in about a year and a half because we think the U.S. will enter a recession. — TA, Bloomsburg, Pa.
Dear TA: Some might say that's a bloody dumb idea. And if there is such an animal as a quality junk bond, I don't know it.
I'm certainly not a font of information about aggressive issues that could increase in value by 50 percent in 18 months. So I sent a fifth of Old Crow to an old friend, Velveeta Jackson, who lives in Blue Eye, Missouri, with a note telling her I'd call around 10:30 on Wednesday for three aggressive stock recommendations. I called right on time, and without preamble, Velveeta answered, gave me three names and then hung up. She is a superb stock picker but lacks proper manners and loses her social niceties after two drinks. The three names Velveeta shouted were Vertex, Pentair and JD.com. So invest $10,000 in each.
Vertex Pharmaceuticals (VRTX-$172) is a biotechnology company using drug discovery technologies to develop small-molecule drugs that treat major medical problems such as cancer and viral, autoimmune, inflammatory and neurological diseases. Brilliant research people, a fecund pipeline, minimal long-term debt, a 27 percent net profit margin and impressive past and future revenue growth could move VRTX to your target price.
Pentair (PNR-$43), a $5.1 billion-revenue company with a net profit margin of 14 percent, provides smart water solutions for customers worldwide. PNR designs, manufactures and services numerous products and solutions for governments and companies involved with agriculture, irrigation, flood control and aquaculture. Products include water treatment equipment, energy-efficient pumps, filtration products, ultraviolet sanitation, desalination and automation controls.
JD.com (JD-$38) is a $57 billion-revenue e-commerce company in China. Like Amazon, JD sells most things that can be sold, directly through its website. JD provides an online marketplace for third-party sellers, value-added fulfillment services (warehousing and delivery), transaction processing, billing services and marketing services for sellers and suppliers. JD also provides financial products and services, including supply chain financing and microcredit, for online and offline customers and retailers.
The junk bond I'll recommend is Frontier Communications' 10.5 percent bond at par, which matures in 2022 and is rated BB-. It might cover your income loss, but I'm not comfortable with a single 10 percent bond to cover your income deficit; that makes me nervous for you. I'd prefer an exchange-traded fund with a 10 percent current yield that owns a diversified portfolio of junk bonds. Owning a managed ETF with a large portfolio of junk bonds yielding 10 percent is a lot safer than owning one individual issue. So consider investing $20,000 in the MFS Intermediate High Income Fund (CIF-$2.49), which pays 2.1 cents a month, for a current yield of 10.1 percent. CIF's portfolio owns about $52 million of mostly 144A bonds. Some of their names are Freeport-McMoRan, Tallgrass Energy, Six Flags Entertainment and Allison Transmission. These bonds, under the Securities Act of 1933, are non-registered securities. The 144A bond is sold by the issuer to an "initial purchaser" (usually a broker-dealer) as a private placement. The broker-dealer the sells the bond only to qualified institutional buyers, such as ETFs, mutual funds and insurance companies.
I wish you success. If this fails, you may have to find a part-time job as a product inspector at the roach paste factory south of Bloomsburg on Route 522.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.