Medtronic gains as bargain hunters lift stock; Newmont higher with gold; SanDisk struggles on

By Kenneth Lim

Boston, Aug. 26 - Convertible prices fell almost across the board on Thursday as underlying stocks continued to take a beating.

Medtronic, Inc. bucked the trend, gaining on bargain hunting after the stock was punished earlier in the week when the company missed earnings expectations.

Newmont Mining Corp. also followed its stock, which has been supported by recent strength in gold prices.

SanDisk Corp. remained a dominant and active force in the market, falling further despite an early rally.

The market in general had another quiet session, with the falling stock market weighing on convertibles.

"Stocks are falling everywhere you look," a trader said. "You can't find buyers anywhere. Plus it's the last two weeks of August, and half the market's on vacation."

The market could be even quieter on Friday, the trader said.

"I don't expect it to get any better tomorrow," the trader said.

Medtronic rebounds

Medtronic's 1.5% convertible due April 2011 stayed put at around par, while its 1.625% convertible due 2013 added a quarter of a point to trade at 100.5, all versus a stock price of $32.25.

Medtronic common stock closed at $32.28, up by 1.29%, or $0.41.

"Medtronic was active today," a sellside trader said. "It didn't change much, but that's not bad considering the market."

Medtronic common stock fell sharply on Tuesday after the Minneapolis-based medical device maker missed earnings expectations and cut its forecast for the year. But the drop was contained on Wednesday, and Thursday saw the shares improve slightly.

On Thursday, UBS downgraded the common stock to "neutral" from "buy" and lowered its price target to $33.00 from $53.00.

The trader said some of the initial reaction was overdone.

"You're talking about Medtronic," the trader said. "Sure, they didn't have a good quarter and they're probably not going to have a good year, but they're still making money and their credit is still solid. That's not bad in this environment."

The trader said there were elements of bargain hunting on Thursday.

"I don't think I'm the only one who thinks that way," the trader said. "Medtronic was one of the gainers today when everyone else was taking a hit, which means some people thought it was worth buying."

The convertibles have held up well amid the turmoil in the common stock.

"The [2011s] are maturing in half a year, so they're trading to maturity now," the trader said. "The 2013s are a little more interesting, but they haven't lost as much as the shares, so they don't have as much to recover from."

Newmont shrugs off news

Newmont's 1.25% convertibles due 2014 were marked at 140 versus a common stock price of $59.45 late Thursday, about 2.5 points higher than the day before.

The underlying stock gained 1.19%, or $0.70, to close at $59.44.

Newmont is a Greenwood Village, Colo.-based gold mining company.

The convertibles and the equity have risen steadily over the past month on the back of recent gains in gold prices, a sellsider said.

"It's a proxy for gold," the sellsider said. "If gold is doing well, guys like Newmont are going to do well. It's a pretty straightforward trade."

The sellsider said the market did not appear to be moved by a potential dispute between Newmont and an Indonesian company. Newmont on Thursday rebutted a claim by PT Pukaufu Indah over shares in an Indonesian mine operator that Newmont had sold.

Newmont said the sale of the shares, which is ongoing, was part of an agreement with the Indonesian government. Newmont also said that, contrary to Pukaufu Indah's assertions, it did not receive payment from Pukaufu Indah for the divested shares.

"Doesn't look like a big deal," the sellsider said.

SanDisk falls further

SanDisk's new 1.5% convertible due 2017 dropped 1 point to trade at 92.5 against a common stock price of $36. on Thursday.

The common stock fell 5.24%, or $1.98, to close at $35.78.

"It's just ugly," one trader said. "If you bought this as an outright, it's really painful right now. You're down almost 10% in one week."

The notes sold at par on Aug. 19. Since then, the stock has dropped by more than 10%, which is the main reason for the convertibles' weakness.

The trader said hedge funds have not fared as badly, with the convertible slightly better on a dollar-neutral basis.

"Better hedged than outright at this point," the trader said.

But the trader said the name could be a buy opportunity for investors looking for bargains, although whether SanDisk will recover over the next week remains to be seen.

"If you're bullish on SanDisk, you'd be thinking of this as an opportunity," the trader said. "The only thing is I don't think a lot of people are too interested in making any big moves over the next two weeks because of the holiday. You might see a bounce when we come back after Labor Day."

Mentioned in this article

Medtronic, Inc. NYSE: MDT

Newmont Mining Corp. NYSE: NEM

SanDisk Corp. Nasdaq: SNDK

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