Credit Suisse’s reverse convertibles on Compania de Minas Buenaventura offer timely bet

By Emma Trincal

New York, Jan. 17 – Credit Suisse AG, London Branch’s $500,000 of 9.15% reverse convertible securities due Jan. 22, 2021 linked to the American Depository Shares of Compania de Minas Buenaventura SAA provide good value amidst an overpriced U.S. stock market, said a contrarian portfolio manager.

The payout at maturity will be par unless the shares finish below the initial price and close below the 75% knock-in level on any day during the life of the notes, in which case investors will receive a number of the company’s shares equal to $1,000 divided by the initial share price or, at the issuer’s option, an amount in cash equal to the value of those shares, according to a 424B2 filing with the Securities and Exchange Commission.

Interest is payable quarterly.

Entry point

The fixed rate offered by the issuer comes with a riskier American barrier, which can be breached on any trading day unlike the typical European barrier observed at maturity only, which prevails in most structures.

But the American barrier also enables the pricing of a fixed coupon. The question therefore is whether the risk is worth taking.

“This American barrier definitely increases the risk,” said Steven Jon Kaplan, founder and portfolio manager at TrueContrarian Investments.

“But at the same time, a lot of that risk is offset by the value of the shares. You’re getting in at the right time.”

Kaplan’s style is centered around the notion of buying at the right price. He believes that Compania de Minas Buenaventura, a stock that he owned in the past, meets his value standards.

Looking at both the stock and the sector, he noted that prices remain low.

“We already had a pullback in 2019 in this sector,” he said.

Between August and last fall, gold miners as measured by the VanEck Vectors Junior Gold Miners, a an exchange traded fund that tracks smaller-cap gold miner stocks, fell by 17%.

“For an individual company, a 25% drop is certainly possible.

“But it already happened twice,” he said.

Sinister January

In mid-2015, the stock reached a high of $12.26 a share before collapsing to a $3.23 bottom in January 2016, a stunning 76% drop.

Kaplan has a theory about the month of January as a seasonal trend.

“Come January, it’s a new beginning. People purchase their gym membership. By February they no longer go to the gym. In investing, it’s a little bit the same. They look at the list of the top performers of the past year and buy them.

“Of course, what they buy is overvalued and they’re doing it at the wrong time, just before prices go down.

“People tend to buy what was up and that’s when you run into serious problems because stocks don’t go up forever,” he said.

Seasonal trend

Many bear markets kicked off in January, he said. He pointed to the bear market of the 1970s, which began in January 1973. The dot.com crash hit in March 2000 but the Dow Jones industrial average topped out in January of the same year, he added.

Price declines are different in bear and bull markets, especially in intensity, he said.

“While stocks can drop 10% or 20% in a bull market, if you get a bear market, you can see losses of 50% to 70%,” he said.

Kaplan believes that gold miners are on an uptrend.

High rise

The share price of Compania de Minas Buenaventura just fell to a 52-week low on Tuesday.

After a stock declines significantly, chances are it will recover. The harder the fall, the stronger the recovery, he explained.

He went back to the Jan. 20, 2016 bottom for the sector. On that day, the price of Compania de Minas Buenaventura closed at $3.23. In August, the share price had climbed to a new high at $16.12, quintupling in less than seven months.

“It’s typical after a stock collapses and people capitulate to see it going up violently.

“Since then it’s been much quieter,” he said.

While the stock price is not as depressed today as it was four years ago, it still trades in the lower end of the range.

From a peak at $17.82 last summer to an intraday 52-week low on Jan. 14 at $13.27, the stock is already down more than 25%.

“You’re really coming in at a relatively low price,” he said.

“That’s why I don’t think you’re likely to breach that barrier even though it’s on a daily observation basis.

“I think we have one or two years more of a bull market in this sector.”

Dollar to weaken

Another factor that may support the rise of the stock and gold miners in general is the U.S. dollar, he said.

The price of gold tends to appreciate when the value of the dollar declines, simply because gold becomes cheaper to buy in other countries.

“The U.S. dollar has been strong. And gold miners have done pretty well even with a strong dollar,” he said.

Very soon, a lower dollar should push the price of the stock higher.

Kaplan is bearish on the greenback due to the existence of a number of political uncertainties in the United States.

“We’re in an election year. We do have a political crisis with the Senate trial. We don’t know who the Democratic nominee is going to be,” he said.

“The U.S. dollar is going to be weaker.”

A very old man

Kaplan’s bullish outlook on gold stocks does not reflect his views on the U.S. equity market as a whole. Quite the contrary.

“U.S. stocks keep on reaching new record highs. The intensity of this rally is typical of what happens at the end of a bull market,” he said.

“Unlike the U.S. markets that bottomed in 2009...11 years ago, the gold miners bear market ended in January 2016, only four years ago. This is a young bull market. It hasn’t matured yet. It’s more like a child or an adolescent while the S&P is celebrating its 100th birthday. Everybody thinks this 100-year old guy has another 10, 20 years to go but it’s a ridiculously aged, matured bull market.

“People are buying now at the peak. When the market bottoms, they panic and sell. People tend to perceive risk as high when it’s low and they’re oblivious to risk when it’s high. And risk is high today.”

The bullish case for gold stocks would be validated if the U.S. stock market was to enter correction mode or bear market territory.

“People buy gold because they’re looking for uncorrelated assets to diversify their portfolio. This is one more reason why I think gold miners can rally for a good couple of years,” he said.

Upside risk

If the sector and the stock move up strongly as seen in the past, investors in the notes may miss on some of the upside. That’s one of the risks, he said. But the note offers advantages equity investors would not have.

“If you want to get the greater return, you would want to buy the stock or the sector directly,” he said.

“But there’s kind of a trade-off between capping your upside at 9% and protecting your downside if the stock doesn’t drop more than 25%.

“Of course, there is always a risk that you could breach the barrier. But we just had a 25% drop since last summer.

“If the sector is in a bull market as I think it is for the next one or two years, a 25% price drop is less likely.”

Disclosure

Compania de Minas Buenaventura is Peru’s largest publicly traded precious metals mining company.

The stock is among the top holdings in the two main gold miners ETFs – the VanEck Vectors Gold Miners, which trades under the ticker “GDX,” and the VanEck Vectors Junior Gold Miners.

“I indirectly own the company as I’m long both ETFs, so my view on the stock may be biased,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes will settle on Wednesday.

The Cusip is 22549J5D8.

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