Oppenheimer Bonds Called

Despite the action in Tesla’s share price, our August 15, 2025, 5.3% bonds have provided us with absolutely no drama.

That is a good thing.

As bond investors, boring is exactly what we are looking for.

Our purchase price for our Tesla bonds was $102. Today the trading price on those bonds is just a shade under $104.

That increase in price means that the market’s confidence in the company to keep making all of its contractually obligated interest payments on those bonds has increased since our purchase.

Tesla’s share price, on the other hand, has been a roller coaster.

After starting 2020 at $83, the market rocketed Tesla’s stock up to a high point of $498, which was reached on August 31. That is a fivefold increase from the start of the year and quite unbelievable considering a pandemic has been raging.

After hitting that high of almost $500, Tesla’s share price has had a pretty meaningful correction. That isn’t a surprise given the run it has been on, and shareholders are still sitting on huge gains since the start of the year.

More importantly, that huge share price increase has also been very good for us as Tesla bondholders.

Tesla’s Huge Equity Issuance Equals Massive Cash Infusion

I don’t know whether Tesla’s shareholders are thrilled, but they should be.

Tesla announced in September that it would be taking advantage of the stock market’s absurdly high valuation of the company by raising $5 billion of cash through an equity issuance.

That is cash that will go directly into the company’s coffers.

At the company’s recent price, the stock market is valuing the entire Tesla business at more than $380 billion.

This is the valuation at which Tesla will be issuing new shares.

I believe that Tesla is a really innovative and cool company. Its cars are the greatest I’ve ever driven. But that $380 billion valuation is really out there. Tesla is still in the early innings of a long-term growth story, and the financial performance of the business does not currently justify a valuation of that size. The stock is ahead of the business.

Currently Tesla has the ninth-largest valuation of any stock listed in the United States.

That means it is more richly valued than 492 out of the 500 stocks in the S&P 500. The S&P 500 includes the most profitable businesses on the planet.

For perspective, consider that at the current stock price, the market is valuing Tesla the same as it is Walmart, the cash-gushing money machine.

Over the past 12 months, Walmart has posted net income of $17 billion per year.

Tesla meanwhile just managed to squeak out its first-ever 12-month period of profitability.

The fact that Tesla is taking advantage of its extremely rich market valuation to raise $5 billion of cash through an equity issuance is exactly what management should be doing.

I wish more management teams would use the market to their advantage.

When a company’s shares are overvalued, management should exploit that by issuing shares. When a company’s shares are undervalued, management should exploit that too by buying back stock in the open market.

This equity issuance is good news for shareholders and even better news for us as bondholders.

This is a huge infusion of cash that will immediately strengthen Tesla’s balance sheet and the company’s ability to make good on its contractually obligated bond payments.

I feel even better about our Tesla bonds today than I did prior to the pandemic.

Oppenheimer Holdings Bonds Called at $101.69

On August 28, Oppenheimer Holdings (CUSIP 683797ad6) announced that it will be calling our July 1, 2022, 6.75% bonds.

If you own the bond, you will receive $101.688 in exchange for your bonds on September 28.

Oxford Bond Advantage recommended these bonds in September 2017. With this redemption also taking place in September, we will have enjoyed this sizable 6.63% income stream for three full years.

In this interest rate environment, that is a fantastic yield.

I would have loved to continue holding the bonds and receiving those interest payments until their maturity date in 2022, but, nonetheless, Oppenheimer has been a great investment for us.

I’ll have another great recommendation for you soon.

Mailbag

Starting with about $5K. Should I wait for new recommendations, or are there still good buying opportunities in the portfolio? – John W.

There are plenty of good buying opportunities. Any bond that is rated a “Buy” can still be bought. I also expect to have a new recommendation next week.

About the U.S. Steel bond (CUSIP 912909am0), below is a copy of an assessment from S&P Global Market Intelligence of its ability to pay its debt:

Although X employs a capital structure that appears to be appropriate for its Steel group, there may be some concern over its ability to service its debt; operating profits and cash on hand are not currently robust enough to cover interest payments. Its capital resources total $8.0B, of which +51.3% is equity and +48.6% is attributed to debt.

We have a “Buy” on this bond. Is it really safe? Or is it going to go the way of coal and oil bonds? – Rich R.

The bond is rated B and has a current yield to maturity of more than 13%, so I wouldn’t classify it as “safe.” That being said, do I think U.S. Steel will default? No.

The pandemic caused U.S. Steel to lose money in the first half of the year. But it paid only $114 million in interest expense, and it has $2.3 billion in cash on hand.

Auto manufacturing is returning to normal, and demand for steel should rise as the global economy eventually rebounds.

I’m not especially worried about U.S. Steel’s ability to pay back its bonds. For investors who can handle the risk, I believe the August 15, 2025, 6.875% bonds are very attractive at this discounted price of around $77.

For what it’s worth, George Soros and Ray Dalio, two legendary investors, started new positions in U.S. Steel’s stock in the second quarter. If U.S. Steel were not going to make bondholders whole, it would be very unlikely for Soros and Dalio to have bought the shares.

Hoping your longs go up and your shorts go down,

Marc

If you have any questions, email editor@oxfordbondadvantage.com, or call any of the brokers listed below for help…

• Ron Kramer: 917.887.2386 or 877.70.bonds (877.702.6637)
• Ron McCoy: 407.614.2006 or 877.79.mccoy (877.796.2269)
• George Walters: 321.293.0284 or 800.329.1984