17-19% return on Investment good?

[FunkyCold5]

Wanted to give anyone who is investment savvy a heads up. CYA is a 3rd party Corporate Backed Trust Certificate offered by Lehman Brothers. The price is a litte under $12, but I'm giving a target of $13.

CYA is distributing a semi-annual dividend of $1.125/share on December 10th. They consistently provide that dividend semi-annually and 2.25/share yearly. Price doesn't matter because it's corporate bonds, so you will receive the dividend consistently.

Once you get the dividend, you have the choice to stay with it or sell. I will recommend selling just because the price will go back down because of profit taking.

****Disclaimer: I'm just stating an opinion, you should do your own due diligence before purchasing securities. You may lose money when purchasing this security.


Andrew

 

[jred321]

not bad, i live right across the street from (one of) the lehman bros building i know 2 people working in ny with them and 2 in london right now working with them. solid company.

is there a minimum amount you have to buy?

 

[FunkyCold5]

I believe they sell in lots of 100. I always buy a minimum of 100 shares, just to make it easy to calculate how much I need to speed and earnings when I sell.

CYA is the ticker symbol by the way, if anyone is wondering.

I saw this when it was at 6.30, but the next day I tried to buy it jumped at 8. So I bought 100 @ $8...and then bought another 100 @ 11.80. I figure, when I bought the stock at $8, I'm getting a 28% return on my investment per year (that's the yeild at that price). When I bought at 11.80 the yield changed to 19%. So, I figured 19% is still a great return, so I bought another 100 shares. It's only gonna go higher from here because people are buying into the dividend that's going to be disbursed Dec. 10th.

Since I bought at a real low of $8, I'm gonna keep my 100 shares and not sell. But, since I paid 11.80 for my second 100 shares, that'll be my play money. I will sell that 100 shares after the dividend, knowing it'll go back down below 12 after the dividend is paid out. And then buy again the next dividend payout in June 2005 (another 1.125/share).

If this is confusing anyone, please don't hesitate asking questions. I just wanted to clarify that 1.125 is paid out every June and December. These are corporate bonds, that's why the dividend payout never changes, it'll stay the same until the certificates mature. But, what lehman brothers does is create a 3rd party security, making these bonds seem like stocks, so anyone can buy and sell anytime they please.............but the dividends will stay the same no matter what the stock price is. Hence the HUGE return.

 

[kgo]

i hope that bond doesn't default.....what share class is it and what's it's risk rating?

 

[FunkyCold5]

Caa3/CCC

by Moody's and S&P.

Series 2001-06, Class A-1.

My recommendation is to hold it until the dividend is paid. Then sell afterwards. Dividend is declared dec. 10 and paid out 5 days afterwards. 5th to 6th day is a good time to sell. Not only do you get the 1.125 dividend payout, plus you get out of your position at whatever price the stock has increase before the dividend. You can purchase this Corporate Backed Trust Certificate (CBTC) the day before the dividend is offered and still get the dividend, the only problem however is, it might be at a higher price, since like I said before, but at $11.80, you'll be getting a 1.125 dividend, which is a 19% return on your investment, so I'm sure a lot of people will jump on the opporunity. Thing is, you will HAVE to sell after you receive the dividend, because the next dividend doesn't pay out until June 10th of 2005. So, like for the dec. payout, you don't have to buy in until the day before the dividend is paid, so if you dont' want to leave your money in the security, get out and get back in on the next dividend payout.

 

[kgo]

i use to have to calculate the waterfall of each classes payout trauch for multiple corp. bonds. the price is at a higher price because the interest has accrued over the paydown term. since you're an A-1 class share holder, you should be safer than say a class C shareholder, but still the risk rating is pretty bad. you remember the term "junk bonds"? greater risk = greater potential for greater returns. theoretically, you shouldn't be making any money from holding the bond for a short term engulfing the paydown date, that is unless someone doing the calculations (including auditors) are screwing up. after the dividend payment, the price of the bond on the open market should adjust itself to reflect an equal value of the dividend....thus no profit, just receipt of accrued interest.

 

[kgo]

btw....i didn't mention that there are a ton of other factors that would change the price of the bond, such as:

interest rate
change in risk rating
the financial stability of the company itself
the liquidity of the bond (ex. if all of the sudden no one wanted to buy it -> drop in price)
analyst downgraded it (goes with risk rating)
remaining term until maturity
and a bunch more

 

[FunkyCold5]

kgo, you are correct except for one aspect. We aren't purchasing the bond directly, we are purchasing a "stock" directly related to the bonds. It's a TRUST security. Like REITs, but not.

I'll give you an example. A person buys $1,000 bond from a company/gov't whatever, that person must hold the bond until the callable date, but the rate of that bond is fixed. True, you lose money depending if the rates go up or down. Value of any bond goes down when rates goes up.

Now, second example is Lehman Bros. They buy all these bonds but hold it for themselve. Now, they create a 3rd party market for these bonds, but sell them as stock shares. They offer $25 IPO price, providing a 9% return, hence the 2.25/share dividend paid out semi-annually. SINCE it's third party and no individual is actually buying a bond certificate for themselve, you may buy and sell at anytime (bonds treated as stocks).

Now, back to the dividend, true when the dividend is paid out, the market price will reflect the payment of cash, hence it'll go down a dollar or so. Here's the thing though, if you review the technical data, price fluctuates with relation to the dividend. There will be strong buys usually 3 weeks before the dividend payout. So, for example I paid $8 for my first 100 shares. Now it's at 11 and change. Where ever the price lands, I get the dividend payout, and then the stock price changes to factor in the dividend, wherever the stock price ends up after the dividend payout, is also PROFIT for me.

$8 for 100 shares = $800.
let's say the price is $12 on dec. 10 when div. is paid out.
I receive 1.125/share *100 = 112.50 dollars in my pocket.

Stock price goes down to let's say $10.50 to reflect the dividend. i sell my 100 position.

10.50*100 = 1050

1050 - 800 (purchase price) = $250 profit.

So, not only do I get the 112.50 in dividends, but I get an extra $250 for the sale of my stock.

Total Net Income = $362.50

 

[FunkyCold5]

When the stock price was at $25, the yield was 9%......the rate the bonds pay out. Now, since the stock price has fallen, the yield increase. The dividend payout cannot change because it's is locked on that 9% at that $25 price. If you look all the way back to the first offering in 2001, the semi-annual dividend has been consistently 1.125/share no matter what the price of the stock is. That's why it's a good buy short term for the return you get. Even though you are skeptical about this, keep an eye on the ticker (CYA). When it nears Dec. 10th if it doesn't go near $13, then you are right, but I'm pretty sure people will be willing to pay $12 to get that 19% return, plus the possibility of selling higher than $12 after the payout. Like anything else, supply and demand, if there is enough demand to get in on that dividend payout, the price will increase.....how high, nobody knows.

 

[kgo]

i'm not saying that you're wrong about the strong buy market when it approaches the determination date, but the fact that at the price goes up even more would be more about supply and demand. which would help in your theory of short term gains with this investment. but dont u think that if all the analyst and speculators and even arbitrage investors would have figured this out by now? if it was so easy to make this much money in such as short period of time, wouldn't companies devote extraordinary sums of money solely for this purpose? BOOM...bottom line is fatter.

one thing to remember is that as it gets closer to the maturity date, there will be less price fluxuation.

 

[FunkyCold5]

Oh I totally agree. Like any situation that deals with the purchase and selling of securities, it's all about supply and demand. If a company has perfect valuations and amazing earnings, BUT no one wants to buy the stock, I don't care how good the company is, if no one wants to buy it, it will not move up...most likely it'll move down. If a company reports bad news, but there seems to be an outrageous amount of buy bids, then that ticker is going up.

Couldn't you say the same thing about the analyst, speculators, arbitragers, etc? about normal hidden gem stocks? How many people know about Trust Certificates? You thought I was talking about the actual bond at first, and I hope you still don't think so.

You could have said the same thing about any other stock that analyst haven't bothered researching or analyzing. There are so many stocks out there, no one can research them all, and usually the main thing companies, analysts, and investors look for is whatever is infront of them.....companies that are in the news or blue chip. You have to rely on yourself to find that hidden gems and not the analyst. Usually, by the time analyst, corporations, and CNBC/CNNFN find a hidden gem, it'd be at premium by the time normal schmoes like you and me can get in on it.

Anyways, just an opinion on this particular stock. That's why people have to take it with a grain of salt. If you think it's bad, by all means, dont invest, but take a gander at it. If you think it's at a pretty decent price, then you decide what you want to do. I've just been doing well recently and wanted to share my discovery.

 

[kgo]

my initial reaction is to say that the profits are due to the risk....but damn, 17-19% on a Caa3 rating is damn good. just kinda weird that it's a Class A-1 share. usually, those have better ratings. but eh....gem it is.

 

[kgo]

and very true about the general public finally learning about some kind of "new product". so many ways to repackage securities and derivatives. ah, derivatives of derivatives....soon the market will be flooded with those. just that much more for the new guy to learn on the first day.

why can't i just win the damn lotto!

 

[FunkyCold5]

Oh definitely there is risk involved. Just like the comparison between individual stocks and mutual funds. More risk in stocks, but more reward (if you choose the right ones). Less risk in mutual funds, but you can still lose all your money (just take a look at 2000-2002 returns on any mutual fund).

Yeah, once that particular stock gets enough publicity ie. analysts, cnn, cnbc, etc. stock just sky rockets. for example TASR and INVN. So hard for us simple investors to get in on time.

And don't you worry, you're not the only one wondering why can't you just can't win the lotto and live a more carefree life. hahahahha.