Buyers still roaming about, looking at power/energy names and for bargains

By Ronda Fears

Nashville, Tenn., May 21 - As stocks continued a southward retreat, in a dreaded trend of late, most convertible players sat on the sidelines and watched their holdings closely. Participants were awaiting the Toys R Us pricing after the close and one syndicate source said the market was gearing up for a stronger deal flow in the next two weeks.

"It was really, really slow today. There were some bargain hunters in the throes of it today, but it was tough," said a dealer.

"This has been a trend - there will be a day or two of gains followed by a string of declines where everything and then some is given back. You come to dread looking up the day after a big spike, because you just know it's going to evaporate before your eyes. We'd hoped that wasn't going to happen after such a strong showing last week, but here we are again."

Players, sitting out due to the decline in stocks that was partly blamed on renewed terrorist attack fears in advance of the Memorial Day weekend, were watching their holdings closely. But some also were looking for potential new deals.

"We look for a good deal flow in the next two weeks," said a syndicate source at one of the major investment banks.

Market sources had been looking to the S&P list of companies with a liquidity crunch as a possible source for potential new deals, and some think there will be more retail names pop up.

"I think The Limited might be a candidate for a convertible, not that I've heard any salesman use that name," said a convertible fund manager in New York.

"But they shelved a $300 million straight bond deal earlier this month due to market conditions. They just reported earnings that improved, and it seems like it might be a possibility."

In addition to Toys R Us, Charming Shoppes has a deal slated for this week, but some market sources think there will be others since the sector is in favor. While retail names have been in favor lately, as much of the U.S. economic recovery hopes are pinned to consumers, the group was lower for the most part Tuesday on weaker earnings than anticipated at Home Depot.

Toys R Us shares ended up 44c to $17.75.

Charming Shoppes shares closed off 24c to $7.66.

The new Pep Boys 4.25% due 2007 lost 1 point to 102 bid, 102.5 offered as the auto parts and service chain's stock closed down 36c to $17.05.

Elsewhere, traders saw selling in Adelphia and a bit more buying in the beaten-down power names that have suffered by the bad press on energy trading.

Adelphia saw some additional selling on a Salomon Smith Barney equity analyst setting a new target of $0 on the stock, one trader said. The stock still stands at $5.70 where it was when the Nasdaq halted trading last week, and there has been no word yet on whether it will be delisted.

"The Solly report pretty much burst the bubble of some of the hopefuls who had been holding on, hoping that there would be a chance for a comeback," said a trader at a hedge fund in New York.

There are probably several opportunities in the power group, however, said Stuart Novick, a convertible analyst at Salomon Smith Barney.

While the bulk of utility-type investors - those that would be holders of power names - are avoiding the likes of Calpine, CMS Energy, Reliant, El Paso, Mirant, Duke Energy, Williams and others, not all are in the same business not conduct themselves in the same manner.

"At this point, people would rather own boring names. There's a lack of credibility for the entire business, at least in the minds of investors," Novick said.

"There's been the California price gauging, or alleged gauging, Enron and now these round trip merchant energy trades. Look at Duke Energy and Williams. They both came out and said they did some of that but less than 1% of their revenues were affected. But both have been hit really hard and probably in cases like these two it's not really a big impact.

"Duke Energy has two preferreds that both are yielding more than 8%. That would be a nice, comfortable place to be if you are a utility investor."

The volatility in energy, utility and power names of late has hurt those with mandatory convertibles, however.

"What's been happening in this sector, with regard to volatility, goes against everything that a utility investor and classic convertible investor wants - stability," Novick said.

"But some of these credits are still pretty good and the yields are nice."

Traders said there was buying in KeySpan Corp.'s new 8.75% mandatory, which closed up 0.5 point to 51.25 with the stock up 55c to $36.69.

Sempra Energy also lured buyers for its 8.5% mandatory, which closed up 0.1 to 24.8 as the stock gained 26c to $24.74.

El Paso also saw a few trades push up its 4.75% mandatory by 0.75 point to 45.25 as the stock added 11c to $34.02.

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