Published: July 3, 2009
The
correct answer is
(D.) STRIDES.As an income
investor, tech stocks don't fit the
typical investing profile because
they carry a low or non-existent
yield. But should income investors
turn a blind eye to the tech sector?
The answer is an emphatic no!
Tech stocks outperformed other
sectors in the past five recessions
and are typically a leadership group
at the end of an economic downturn.
In the last recession of March to
November 2001, for instance, Nasdaq
100 and the S&P both hit bottom in
September. By the end of December,
the broader market was up by just
over +24% while tech stocks had
soared over +59%. This pattern is
being mirrored so far in 2009.
One way income investors can get in
the game is through high-yield
instruments known as CORTS, STRIDES,
and ELKS, which exist on tech
bellwether stocks like Google,
Cisco, Apple, and IBM. What do these
odd names stand for? Strides are
Stock Return Income Debt Securities;
CORTS are Corporate Backed Trust
Securities; and ELKS--the simple
one--stands for Equity-Linked
Securities. STRIDES are a product of
Merrill Lynch, acquired by the Bank
of America (NYSE: BAC); ELKS are
issued by Citigroup Funding, a
subsidiary of Citigroup (NYSE: C).
These securities allow investors to
lock in double-digit yields and
participate in the tech rally. The
securities move in lockstep with the
underlying stocks but thanks to a
conversion option, they participate
in the upside while protecting the
downside risk. They do this by
trading like stocks but providing a
double safety net of being
considered senior debt.
Take for example, the Merrill Lynch
Callable 12% STRIDES on Apple (Nasdaq:
AAPL) which trade under the symbol
AVN. They pay a yield of 11.8% at
current prices, and they're also
closely tracking Apple's heady share
price gains. On March 6th, AAPL hit
bottom at $82.33. The STRIDES, which
were issued at $25, traded at
$16.39. As AAPL rallied from March
into mid-May, so did the STRIDES.
AAPL hit a recovery peak of $131.12
on May 5. The STRIDES traded as high
as $25.05. In other words, AAPL
rallied approximately +59% between
March and May. The gain in the
STRIDES was almost proportional at
+53%.
Given the group's strong
fundamentals, tech should continue
to rally as the economy improves.
And so should those of the holders
of STRIDES, ELKS, and CORTS. Given
this backdrop, StreetAuthority
editor Carla Pasternak hunted for
tech bellwethers with CORTS, STRIDES
and ELKS pegged to their common
shares. In her latest issue of
High-Yield Investing, Carla
profiles nine ELKS, STRIDES, and
CORTS all offering yields at 6.2%
and higher. One is even pushing 12%!
To learn the names of these
securities, and to learn more about
High-Yield Investing,
please visit this link.
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