Market Carnage Presents Opportunity

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The carnage we have witnessed in the stock markets the last week or two has been incredibly painful for most investors, including income investors. We go through many market cycles where various segments are decimated while others remain untouched. But we historically also have had periods where there is no place to hide — we now are in the “no place to hide” cycle. 

Just like everyone else, we have taken some knocks to capital balances. But at the same time, we have resisted an urge to panic in our 2015/2016 Blended Income Model. On 1/15/2016, we purchased Gladstone Capital 6.75% Term Preferred (NASDAQ:GLADO) at a rock-bottom price of $20.90 as panic began due to the company’s exposure to the energy sector. Gladstone Capital is a business development company (BDC) and thereby is subject to the leverage rules of the Securities and Exchange Commission Act of 1940 (they must have 200% asset coverage on senior securities), which gives a good level of safety to its preferred shares. At our purchase price, the shares yield more than 8%. Additionally, we purchased shares of Prospect Capital 6.25% notes (NYSE:PBB) for $19.50, giving the baby bonds (see the baby bond primer for a description of the investment) offering a current yield of more than 8%. Prospect Capital (NASDAQ:PSEC) also is a BDC that must adhere to the SEC’s leverage rules. PSEC has been very much out of favor recently and the fallout has migrated to its notes. 

In addition, we are looking at some very juicy real estate investment trust (REIT) preferred stock yields. In particular, the preferred shares of Ashford Hospitality Trust (NYSE:AHT) have been hammered unjustifiably lower. AHT is in a battle with external activists and the battle is spilling over into the preferred shares. This is an opportunity. There are three series of preferred shares outstanding and one can compare them on our swaps page. That swaps page lists preferred stocks by each issuer to make it easy to compare the share information of various outstanding issues. The current yields on these AHT issues are between 12% and 13%. These are not investment grade, but the risk/reward opportunity looks very enticing. We currently have 1 position in these preferreds and we will be purchasing one more of these issues in the 2015/2016 Blended Income Model Portfolio today.

Lastly, we encourage investors to not panic. If you are in reasonably solid stocks and bonds, they will be very likely to continue to pay their dividends/distributions in the future. When reason returns to the markets’ share prices, share prices in most income issues will rise.


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Tim McPartland

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Tim McPartland
Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.
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