A buy-side technology analyst and a pair of dealer sell-side analysts see only limited potential for price gains in the high-yield technology sector, given strong performance over the last year. Since October 15, 2002, high-yield technology issues have racked up returns of 62.77%, compared to 31.52% for the high-yield market as a whole, according to Merrill Lynch.
The main potentially positive near-term catalyst, according to one sell-sider, would be equity issuance. An example of this occurred recently when ON Semiconductor's 12% notes of '09 jumped some 10 points into the 90s on news of a possible stock offering. When the company formally announced the deal, the bonds climbed above par, and were trading at 102 after last Wednesday's close. The main candidate to issue further equity is Amkor Technology, according to this analyst. However, he sees only one to two points of upside in the company's 7.75% notes of '13 in such an event. They were bid at 101.75 last Thursday.
40/86 Advisors [formerly Conseco Capital Management] still sees running room for IPC Acquisition's 11.5% notes of '09. The company's single issue was bid at 104 last Thursday, and Jeff Hutz, an analyst at the firm, says he would add to the name if 40/86 did not own it already. He points to an attractive 10.5% yield, and notes that the company, which makes phone systems for financial institutions, has paid down half of its bank debt in the year-and-a-half since the bond issue was priced. He also points to IPC's 70% market share, and the fact that most of its revenues come from servicing existing clients.
Despite the lack of upside, the analysts say they are hard-pressed to identify any potential blow-ups. One of the sell-siders says a market-wide sell-off would have the greatest impact on highly leveraged names such as ON and Lucent Technologies, which saw its 6.45% notes of '29 at a 69 bid last Thursday. Another sell-sider points to Flextronics International's 6.5% notes of '13, reasoning that they are vulnerable to a Treasury sell-off due to their low coupon.