Jim Cramer, the host of CNBC’s mega-hit show Mad Money has said that 60% of a stock’s performance is related to its industry. If home builders are doing poorly, most home building stocks will be doing poorly as well. No matter how good a company’s management team or individual characteristics, much of a company’s performance will be determined by factors out of its control. Home builders don’t control the overall economy, prices on the real-estate market, or the availability of credit for mortgages.
For bonds, a company’s industry will play a major role in determining a the credit rating for its bonds. Bonds in declining industries (like newspapers) or where there is lots earnings volatility (oil drillers) will have lower credit ratings than other industries. Furthermore, two bonds with the same ratings but in different industries may have very different yields.
You will receive more yield when investing in the bonds of financial services companies (such as Bank of America) and less when you invest in companies provide consumer goods (such as Proctor and Gamble).
Below is chart of industry average yields for investment grade US corporate bonds. All bonds a minimum rating of BBB.
|Industry||Yield To Worst||1 Year Ago||Avg. Maturity Yrs|
Why might bonds of financial companies not have recovered?
For a look at some potential investments which take advantage of this thesis see our post “Are Bank Bonds Cheap?” here.