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Why Amerigroup's Convertible Bonds Make Excellent Insurance

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Bonds pay off -- even when you're wrong.

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Convertible bonds have been among 2009's best-performing asset classes and are no longer figured to outperform their underlying stocks as they did 6 months ago -- regardless of the ultimate scenario. But they still make compelling investments for those who seek market exposure but are nervous about timing.

Take, for instance, Amerigroup (AGP) and the comments of brokerage firm Stifel Nicholas. Last December, the firm downgraded the managed-care provider's stock from buy to hold. At the time, the shares were trading for around $25. Today, the firm remains officially neutral, with the stock trying to push through $30. Not a catastrophic call, to be sure. In fact, the firm's had an excellent record with the stock: It upgraded to buy in July 2007, downgraded to hold a few months later (with the stock up nearly 30%), and then slapped a buy-back on in April 2008 (after a decline of over 33%).

But listen to a summary of what the firm just said, courtesy of Briefing.com.

"Stifel continues to like the Medicaid Managed Care Org. (MCO) model as a current solution for state Medicaid spending challenges. Additionally, they note Medicaid as a reform option for broadening coverage could result in significant growth not captured in current operating expectations.

"However, cloudy reform opportunities are offset by large state deficits. They note states must bridge the fiscal challenges of today with Federal reform dollars of tomorrow. Talk surrounding funding shortfalls -- real or perceived -- may pressure the shares. As a result, they remain interested in AGP shares, but are neutral for now. They believe investors should have these stocks on their radar screens."


In other words: We like the stock, but hesitate to jump in right now for fear of being early.

Here's a solution if you, too, feel this way about the stock: Think about Amerigroup's 2% convertible bonds. I wrote about these late last year in my first Minyanville article, Convertible Bonds: An Investor's Best Friend, when the bonds were going for around $0.68 on the dollar and the stock was around 21. Today, the bonds are around 92 with the stock a shade below 30. So the bonds' performance has come up just a bit short of the stock's over this period -- a pretty resounding confirmation of having owned the convertible.
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Position in AGP

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