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VIDEOLooking to Play HGSI's Huge Move Higher? Consider Convertibles
With the stock itself, the risk/reward is less skewed to your benefit.
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If Leerink Swan is right, the 30-fold gain in HGSI from the lows of several months ago could be just the beginning.
Now, the firm could be wrong. Even analysts sometimes are. And there’s no getting around the fact that, yes, the stock is 30 times higher than it was in the spring.
If you’ve read my column in the past, you probably sense a convertible comment coming (CCC). And you’re right.
Human Genome has 2 convertibles outstanding. I prefer the 2.25% bonds due in 2012.
If Leerink Swann is really right, these bonds -- currently trading around 114 -- could be worth several times that when they mature.
But if they’re wrong, the worst you’ll do -- assuming the company isn't bankrupt at that point, (and given the company’s prospects and recent equity issuance, bankruptcy seems very remote) -- is lose 14 points of principal, or a little over 10%. Plus, you’ll clip a little coupon for a few years, cutting your modest loss nearly in half.
With the stock, on the other hand, the risk/reward is less skewed to your benefit.
So if you’re looking at jumping on board in HGSI, take a long look at the convertibles.
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