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Subject:  Stonemor’s 10.25’s of ‘17 Date:  2/12/2013  10:36 AM
Author:  globalist2013 Number:  34780 of 36040

About a year ago, there was a thread on Stonemor’s 10.25’s of ’17. One side of the debate was enamored of the fat yield. The other side urged caution, using a metaphor to describe the risks.

If I like to fly in fast airplanes, I want a pilot who can do two things: 1) Fly fast 2) Keep the airplane in one piece so we get to fly another day

Any time you have a situation where the pilot has incentives to fly the airplane fast, but doesn't feel a need to keep the airplane in one piece, you have a problem, particularly if you are inside the airplane. :) By analogy, I maintain that an MLP like ETP with general partner ETE is built to give the general partner strong incentives to keep ETP in good shape. If they reach for too much distribution and "crash" the company, ETE's huge unit holdings in ETP become worthless. This incentivizes them to *both* reach for higher distributions *and* keep the company intact.

I maintain at Stonemor there is an incentive to reach for distributions, and insufficient incentive to keep the company from crashing. At Stonemor, the pilot is flying the plane remotely, and if goes down no big deal to him he will just get a new airplane and fly again.

I applaud caution. It is far easier to make up a lost opportunity than a realized loss. But let’s take a look at how Stonemor has done (so far). At the time of the thread, the ASK for the bond was about 95.500 for a single. Currently, the ASK is 106.00 (min 4) by 104.815 BID. And a price chart of the bond confirms the upward direction of prices. A different story is reflected by the stock price, which is flat from a year ago, but did suffer declines between then and now. What about their financials? How does the balance sheet look? Not too horrible, right? STON has a negative net-worth. But they are currently meeting current-expenses from current-revenues, as was the case a year ago, which is why I put on a position, which is why I’ll put on a position in nearly anyone’s debt. The business might be struggling. But it’s not in a death spiral, at least not yet anyway, which raises the whole question of what it mean to be a ‘value investor’.

If a stock or a bond isn’t worrisome, then it also won’t offer much of a return. If it is worrisome, but not overly so, then buying the stock or bond becomes a probabilities game. Across a basket of such securities, is it more likely than not that profits will exceed losses? If not, the game has a negative-expectancy, and you back away. A clear instance of this is playing roulette. There is no betting strategy that can turn roulette into a game with a positive-expectancy. To place just one bet, or ten thousand bets, is to act with the full certainty that you are depending on mere chance to bring you fortune, and that the odds are against you. But if you switch your playing over to a game like Black Jack and the house rules aren’t horribly onerous, you could eke out a positive return through card-counting and disciplined betting. Same-same with betting on junk bonds. If you bet on a single junk bond --doing no more than average due-diligence-- you might win the bet. But you can’t appeal to the odds, because you’re not dealing with a sufficient sample to obtain the risk-reduction that can come through diversification. But if you’re buying baskets of junk, then it does become possible to benefit from the odds *if* the odds are positive over the long haul.

That’s why I took a position in Stonemor. Because I cannot predict what will happen with them, I have to assume that their B3/B- rating is at least representative of the default and workout risks of their peer group. But if I don’t own the peer group, then I can’t apply the odds. But how much of Stonemor I buy does matter. The bet has to be big enough to make a difference, and small enough that it doesn’t. (You’ve gotta be able to survive your inevitable mistakes and misjudgments.) So, it becomes a Catch-22 situation of trading possible upsides against probably downsides, knowing all the while that screwing up to the downside is far worse than missing out on the upside, because you can’t play the game if you lose all your chips, or claw you way back if you’ve even just lost most of them. OTOH, if you’re not turning enough of a profit on each deal of the cards to cover your normal overhead and at least matching what you could be making elsewhere, then you’re wasting your time. So, a lot of risk and uncertainty has to be accepted. That’s just the nature of the investing game.

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