Based on the theory that bond analysts look more closely at company balance sheets, Peter Andersen, portfolio manager at Congress Asset Management, recommends picking stocks based on how company bonds are performing.
“Bond analysts are wired differently from equity analysts, because bond analysts have to look at the coupon payments as a contractual obligation,” Andersen told CNBC.
“So they are much more focused on the current state of the company rather than looking out into the future, and earnings projections. And for a bond analyst, the period for the next coupon payment is the amount of time they look out—and that’s about a six-month period on average.”
Andersen said he looks for dislocations between bond returns versus equity returns.
He likes Joy Global, Warner Chilcott, and Universal Corp. .
“If you look at the stock returns year to date, they have done very impressively,” he said of the three firms.
“That’s because we first saw a strong trend in increasing cash flow, and that in turn offered the company the opportunity to start delevering. And once you start seeing that delevering in the balance sheet, that’s when the equity holder starts paying attention.”
- Watch Andersen's Previous Appearance on CNBC (Dec. 1, 2009)
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CNBC Data Pages:
Andersen and his firm own shares of JOYG, WCRX and UVV.