My Recent "Preferred" Investments
July 19, 2011
– Comments (9) |
RELATED TICKERS: EPM
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I fully admit that I have absolutely no idea where the overall stock market is headed over the next several months, year, or even several years. There's plenty of talking heads on CNBC who will make guesses on that subject for you. I consider myself to be an investment picker. I say "investment" picker rather than "stock" picker because I am willing to look anywhere for returns.
For example, during the height of the credit crisis I was buying corporate bonds hand over fist. I was seeing spreads between corporate paper and Treasuries that I had never seen in my lifetime and might never see again. There was bonds from solid companies that were in absolutely no danger of defaulting that were yielding 8%, 9%, 10%, even more for relatively short terms of five to ten years, sometimes even less. At the time I took advantage of the fear in the market to purchase bonds with outstanding yields-to-maturity from blue chip companies such as Alcoa, Caterpillar, Dow Chemical, Goldman Sachs, American Express, and many others. I continue to reap the rewards of those investments in the form of interest payments. Of course, one could have done, and many did do even better purchasing stocks at the height of the panic as well.
My point is that I'll go just about anywhere for a good investment. Lately I have found a number of interesting investment opportunities in preferred stocks. The financial sector, specifically banks, are typically one of the largest issuers of preferred stock. I have been staying away from banks for the most part because I don't like the black box-like nature of their balance sheets. I recently managed to find and invest in three interesting preferred stocks that are outside of the financial sector. My investments were in:
Evolution Petroleum 8.5% Cumulative Preferred Series A
Pebblebrook Hotel Trust 7.875% PFD-A
ATP Oil & Gas 8% Convertible Preferred (ATPGP.PK here in CAPS)
Note: This doesn't count the strange merger security that I attempted to invest in when ETE agreed to purchase SUG. That one worked out even better because a bidding war broke out for SUG that enabled me to close out quickly (perhaps a little too quickly) with an outstanding gain.
All three of the preferred stocks that I mentioned yield around 8% give or take. I realize that there's always interest rate risk that one takes on when they enter into a fixed rate investment like these, but at 8% that's a risk that I'm willing to take with a portion of my portfolio. 8% beats the pants off of the 0% that my cash was earning just sitting there.
As an added bonus, I was already very familiar with all three of these companies, whose common stock is already very popular with many here at The Motley Fool. The least attractive attribute of the three issues is the fact that ATP has the right to pay the dividends on its preferred stock using its common stock. This negative is at least partially, if not completely offset by the fact that the ATP preferred stock is convertible preferred, which will enable one to take advantage of some of the potentially significant upside that many believe the company's stock has now that the problems with the credit crisis and with drilling permits in the Gulf of Mexico are starting to ease.
Now these aren't exactly the most liquid securities in the world, but I'm fine with that because I sized my investments in them appropriately and they are money that is in my investment fund, which is separate from the emergency funds that I have set aside. This is money in retirement and college savings accounts. I have no problem taking 8% on a portion of that money and watching it double in 9 years.
Do I want to do better than a total 8% annual return? Of course. That's why a portion of my money is invested in common stock that could theoretically do better than that. I have been particularly fond of purchasing stakes in companies that are involved in spin-offs lately. There sure has been enough of them. I currently own ITT, WMB, and UAN, all three of which are spin-off related. I recently added a small position in a fourth spin-off situation that I am not allowed to talk about yet per TMF trading restrictions.
Anyhow, those are my thoughts on some of my recent investments. I'd love to hear others' thoughts on these stocks as well as suggestions of other interesting, special situation-like investments that are on others' radars. Thanks for reading.
Deej
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