Bank of America’s leveraged notes linked to basket offer exposure to three big defense stocks

By Emma Trincal

New York, Aug. 23 – Bank of America Corp.’s 0% Accelerated Return Notes due November 2017 give bullish investors access to a niche in U.S. equity, the defense sector, through a basket of three leading defense stocks

The basket consists of the stocks of General Dynamics Corp. with a 33.33% weight, Lockheed Martin Corp. with a 33.34% weight and Raytheon Co. with a 33.33% weight, according to a 424B2 filing with the Securities and Exchange Commission.

Raytheon is one of the five major U.S. defense contractors, and Lockheed Martin is the world’s largest, according to Morningstar.

The payout at maturity will be par of $10 plus 300% of any basket gain, subject to a maximum return that is expected to be 12% to 16% and will be set at pricing. Investors will be exposed to any basket decline.

Top names

“I like all three stocks,” said Scott Cramer, president of Cramer & Rauchegger, Inc.

“I like the defense sector. I’ve been in it for several years. When things go bad, it holds.”

The notes are designed for investors with a bullish conviction on the sector, he said.

3x up

“If you’re going to have that exposure, this is truly a good bet,” he said.

“You’re going to be capped out, but it’s a 12% cap. If the price is up 4%, you get 12%. If it’s 10%, you’re still doing better without taking on any risk premium for that.”

On the downside, investors do not incur any more risk than if they owned the stocks outright, he noted.

“You get a little bit of diversification in the sector in one instrument.

“It’s one-to-one on the downside, but three-times up to a cap. You don’t have to put every dime on it.”

Cap

For Cramer, the only possible risk would be if the basket price strongly outperforms the cap.

All three stocks have outperformed the S&P 500 index so far this year by at least six percentage points.

“I am bullish on those companies. These are large, well-managed, well-run companies. The demand for the sector is going to be there. Those stocks will not fall out of favor in 14 months,” he said.

“So yes, this thing could go up well above the cap. But I’m willing to take that risk over 14 months.”

Tenor, leverage

Kirk Chisholm, wealth manager and principal of Innovative Advisory Group, said his main concern is the current state of the overall market with benchmark valuations at all-time highs.

“I don’t love the deal or hate it. There are some decent positives to it and also some negatives, more on the macro side,” he said.

“I like the maturity, the timeframe. Fourteen months is a reasonable amount of time to consider these kinds of products.”

The three-times leverage exposure is also attractive.

“The note is capped, but with that type of leverage the basket doesn’t need to go up more than roughly 4% or 4.5%. That part of it is nice,” he said.

Rich market

High valuations in the market, however, pose a double-risk. The stocks may not move up at all, having run the course of the uptrend. Alternatively the basket may trend on the downside in a correction or even bear market scenario.

“I’m not that positive on the upside. The market is very expensive,” he said.

“If the market is neutral, it may be interesting to lever up the gains. You could get a decent return. But I still don’t like the idea of losing dividends, although I know that you always get that with structured products.

“At the same time, the world is not getting more peaceful, so having defense stocks is necessary in a portfolio.”

But the downside risk has to be considered given the lack of protection.

“The market is very rich. If it goes down, your entire investment [is] at risk. Since stock prices are overvalued this type of downside exposure is a concern.”

BofA Merrill Lynch is the agent.

The notes will price and settle in September.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.