If You Liked Them at $27 You Should Love Them at $25

As we continue to work on this new website we are continually seeing charts of perpetual preferreds that show losses of $2-$3/shares since November/December. These are generally modest coupon issues – meaning that even if they are unrated they are likely decent quality.

Our mind always asks ourselves “how many years worth of dividends will it take to recoup lost capital?”.

Investors should plan for losses maybe equal to what have already occurred before 2018 is over  (of course who knows for absolute certainty).

My brother, who invests in a lot of preferred stocks also, and I talked in the last year or so about how we would be more than happy with a solid 7% yield–of course now that we can get a nice 7% we don’t want it as the pain of capital losses will make it unbearable.

This is the situation investors are now in. We need to be purchasing shorter maturity issues to hold for a while, but at some point in time an investor will want to lock in the nice 7, 8 or 9%. When will that time be? No one knows but it isn’t yet, but maybe it is in 6 months or a year. All we can do is wait and see.

It is very possible the issues below will all be trading at $20-$22/share before the year is over.

Here is a sample of charts where the current yields are .4 to .6% better than they were just 3 short months ago.













5 thoughts on “If You Liked Them at $27 You Should Love Them at $25”

  1. Tim, Re your note: “at some point in time an investor will want to lock in the nice 7, 8 or 9%. When will that time be?”

    Have actually been thinking on that. Maybe when the current LT rate approximates a reversion to the LT mean? It would seem at that point the probability of an over or under would be about even. Course, that could take a while.

    1. Alpha, here is some food for thought, that concerns me… I think some of these recent issues that have “went on sale” are fraud yielders to begin with and no real “sales” have even happened. In other words some of these recent price droppers went to market at a BS yield they had no business getting away with in the first place. One must look at history of quality issues that have been around the block to determine pricing deals. Lets look at 3…IPL-D, KTBA, and CHSCO on how they traded around 2013 Taper Tantrum when yields where only a few basis points above where they are now.. IPL-D is $24.49 now and hit 20.28 during 2013 TT… KTBA is $28.02 and was at $25 in 2013. CHSCO is $28.97 and hit $24.40 during 2013. ..
      Quality issues are not on sale now. In fact on relative terms they are considerbly too high. There is definitely room for more pain ahead on perpetuals if one is assuming the rate hiking cycle is not over. My above examples of course represent higher quality examples though. I personally am not too keen on owning crap company perpetuals chasing high yield unless it is a flip opportunity.

      1. Gridbird, For the reasons you mention, we clearly have quite a bit more finger tapping before any LT investing. In the interim, IG and maybe a few BB+ term-dated’s seem like the single best option overall as they provide the highest probability of successful conclusion, but then we also need a few dozen of these to reduce probability (or severity) of loss. Maybe naively, I have found myself looking at KTBA charts from 2009/2010 period wondering how much more time we’d have on our hands if we’d simply gone oversize into it at that point. In a distance galaxy far far away are memories of my grad school days when we evaluated bonds as true LT holds. p.s. CHSCO coupon is 7.88%, yield at today’s price is 6.80% and if I ran my numbers right YTC (IRR) is 4.97%. I find myself wondering what percentage of investors really know what they’re getting.

        1. Yes, Alpha, one has to bake in some assumptions to determine which path is the proper one. For me, the market is treating very kindly term dated issues, adjustables, and debt issues with a maturity lid on them. As long as economy is fine stretching for yield appears fine also, or at least in the since I am willing to do. Just about every issue I own fits one of the 3 above critieria. Very few pure perpetuals are owned by me. Oddly enough I have found myself seeing relative value in old trust debt issues that are past initial call date.

    2. Hi Alpha—yes a reversion to the mean is a long time off. Honestly the movement of interest rates on the face of it is straightforward, but in reality I think it is going to be a long and messy process.

      We know (or think we know) that the Fed will move short rates higher–but the bigger question is the movement of long rates–the balance sheet run off and the global ‘tightening’ that is supposed to occur–will it ever really occur?

      I am thinking more and more about a slightly higher allocation to fixed-to-floating to try to boost returns a bit–this is in addition to the short maturity issues that I have been pushing for 3 years.

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