A Limit to What One Should Pay For Shares

We just glanced at the current trading price of the new Sotherly Hotels 7.25% baby bonds and we see that 700 shares just traded at $26.60. This issue has a early call date in 1 year–this means that if it were to be called in a year a buyer at the current price would realize 15 cents for holding 1 year. This is a yield to worst of less than 1%.

While we wished we could have gotten more than the 200 shares we secured at $25.55 we aren’t so crazy that we would pay this kind of price for shares now.

Obviously someone believes that with rising interest rates that the bonds will not be called early and they may well be right–but even so do you want to accept a yield to call in 2021 of 4.9%?

9 thoughts on “A Limit to What One Should Pay For Shares”

  1. They possibly failed to use a limit order but instead used a market order which as you know can be disastrous when trading these thinly traded issues. So you might want to place a GTC sell order at $28 or so for your 200 shares and see what happens. I do this for several that I own and every once in while, I get a bite.

  2. Hi Leonard–yes that is possible, but the trade was 700 shares—hopefully someone dropping $18,000 is smart enough to do it right–but one never knows.

  3. Sotherly recently sold a preferred with a 7.875% coupon which is not callable until late 2022. So what is the attraction to a bond paying less, and which will be called sooner?

  4. Hi Larry–the baby bond has a ‘date certain’ for redemption. The issue you refer to is a perpetual preferred meaning it has no maturity date. For those that claim to have no sensitivity to capital losses the perpetual would be preferred. HOWEVER I would guess that the perpetual could fall to $20 (or some such number) if interest rates continue to rise resulting in a massive capital loss. I have found few people that really have little sensitivity to capital losses which results in a ‘buy high sell low’ result.

    We know from experience that we are sensitive to capital losses so we prefer date certain maturities.

    Additionally the debt issue is higher on the capital stack so if they have financial problems they first cut the common dividend, then the preferred dividend and lastly debt payments.

    1. Tim, I think I’m missing something obvious, if so then please indulge me. If I get 7.875% yield on my original investment, forever, that’s all I care about. If the share price drops due to interest rate volatility, so what? There is no sell button on these shares, as far as I’m concerned. Never.

      1. Larry, If interest rate risk is not a concern, might want to consider credit risk. Even if never planning to push the sell button, deteriorating financials in any firm could alter that view quickly. The 7.875% coupon you referenced is telling you something. SOHO might be acceptable for a term-dated issue like SOHOK, though the balance sheet does not appear to be perpetual-friendly.

  5. Larry–I don’t think you are missing anything if you can stand the capital loss. I notice many people that say they are not sensitive to the capital loss and then when they see a $15,000 position fall to $10,000 over the course of a year they sell fearing further capital losses–or worse.

    We invest for our own emotions and after just shy of 50 years of investing we personally don’t react good to the capital loss so we have more modest income goals with more stable capital.

    Just a personal choice one makes I guess.

  6. buying right now on this is pure euphoria and stupidity. small paltry shares trading hands and high price stands for “ridiculousness.” No thanks at these prices. This is what makes a market with investors doing crazy stuff like this.

  7. At maturity, the capital obtains plus the capital losses useful to lower personal income

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