Junk Bond Picks For Those Willing To Brave Market Turmoil

Eight speculative-grade companies offer opportunities for high returns, analysts at Morningstar said in a report that picks companies that are most likely to be acquisition targets.

The picks: Alliant Techsystems Inc. (ATK), Cloud Peak Energy Inc. (CLD), Equinix Inc. (EQIX), Leap Wireless International Inc. (LEAP), MetroPCS Communications Inc. (PCS), Polypore International Inc. (PPO), Range Resources Corp. (RRC) and Sprint Nextel Corp. (S).

Sprint, for instance, could be an acquirer but at the same time become a target for an acquisition, the Morningstar report said.

"As the last independent nationwide wireless carrier around, a number of other financially strong firms could be interested in Sprint, including cable companies like Comcast," said Rick Tauber and Jeff Cannon, the Morningstar analysts, in their report.

Market participants see a wealth of opportunities for investors in the junk-bond market at current low prices and high yields. Some investors feel that rising yield on these bonds more than compensates for the risk of a domestic slowdown and Europe's woes. Average yields have risen to 9.51% as of Sept. 30, surging from 7.33% at the end of the second quarter.

"I find high yield to be attractive based on what you are getting paid for the risk of loss," said Randy Parrish, high-yield portfolio manager at ING Asset Management. "The spread you are getting is sufficient for the risk."

But it is not easy for many investors to forget the lessons of the recent credit crisis. While most speculative-grade companies are in good health today, the possibility of a rapid deterioration is not far from the minds of investors, especially after a recent lowering of earnings forecasts by a couple of high-yield issuers. In addition, companies with weak balance sheets, like American Airlines parent AMR Corp. (AMR), have taken a beating on concerns that it could be on the brink of restructuring.

"We believe the upcoming earnings season will provide some light as to where the market will head," Morningstar's analysts said. "Numerous negative announcements and revised downward guidance could continue to pressure the market."

Already, a measure of liquidity of speculative-grade companies, Moody's Liquidity Stress Index rose to 4.1% in September after holding at a record low of 3.9% between June and August of this year, according to a report released Tuesday.

The index rises when liquidity to companies--including their access to cash, sources of liquidity and ability to raise cash--weakens. Moody's Investors Service noted that it had downgraded the liquidity ratings of 11 companies in September, while five were upgraded.

Despite this gloomy outlook, investors believe that some companies with good credit are long-term buys.

"There are higher-quality high-yield companies with fairly stable cash flow streams, we are looking at those as long-term investments," said Jim Keenan, head of leveraged finance portfolios and investments at BlackRock.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468;

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