ALE Notes 2
As outlined in ALE Notes 2: Another round at the bar of 28 Jun 12 (Buy for Yield – $100.50), this income security will most likely be redeemed for cash in 2014 but could last until 2016 at the latest. Such shorter-term securities are extremely sensitive to changes in price—a small increase in price paid leads to a large fall in expected yield to maturity. The stock is up 1.5% since that initial review, less than half of which is justified by the increase in accrued interest (a topic outlined in detail in this Q&A response).
The effect of this apparently small increase in price is to drive the yield to maturity down substantially—from the three-month bank bill rate plus a margin of 4.6% at the time of our initial review (assuming a 2014 maturity) to a margin of roughly 4.0% for today’s buyer. That’s enough to temper our enthusiasm for the opportunity, buying a short-term security is one area where it pays to quibble on price (ignoring Phil Fisher’s otherwise wise counsel). For those able to take on a little more risk, the ALE Property Group stapled securities have once again become more attractive in price (see update of 27 Jul 12). If the income securities cheapen again, we’re ready to pounce. But, for now, the time has come to downgrade to HOLD.
Note: The Income portfolio owns both ALE Notes 2 and ALE Property Group stapled securities.