Nothing Ever Wrong with Taking a Profit
By: Tim McPartland,
We are strong advocates for not “trading” income portfolios, although there have been a few times when readers have accused us of overtrading. Regardless of how often one believes it is proper to trade, we are adamant that there are times when one should “take the money and run.”
Recall that back on Jan. 20, we wrote an article, “Market Carnage Presents Opportunity”, where we outlined some opportunistic purchases we made on Jan. 15 and pointed out an opportunity in Ashford Hospitality Trust (NYSE:AHT) preferred stock. On Feb. 3, we outlined numerous actions that we had taken during January — both sales and purchases.
Each of these actions has been highly beneficial to our portfolio performance, but none as beneficial as the purchase of the Ashford Hospitality 9% preferred stock (NYSE:AHT-E). We purchased 400 shares for $18.68 in the model portfolio on Jan. 20 and the shares traded today at $25.11. Earlier this week, we sold our shares and took down a $3,556 profit on the initial $7,480 investment.
We purchased other shares during the January market sell-off such as the “baby bonds” of Prospect Capital (NYSE:PSEC) and the term preferreds of Gladstone Capital (NASDAQ:GLAD). We have profited strongly on these issues, but are not ready to lock down the gains just quite yet.
We would like to review why we decided to harvest the profits in AHT-E. First, we were in overweight Ashford Hospitality preferreds. In addition to the AHT-E issue we own the AHT-D issue, which gave us a total of 800 shares, which is beyond our normal concentration.
Second, after our activity in January and February, the Blended Income Portfolio was down to 9.77% cash (dry powder), which, while normally a good level to be at, is low for what we perceive to be the current high risk market — and we need to prepare for the next opportunity that may occur.
Third, Ashford Hospitality is a poorly run lodging Real-Estate Investment Trust (REIT) with high debt levels. The company has been warring with activist investors, which has resulted in some foolish actions. Back in May of 2015, the company purchased a small portfolio of “select service” hotels for $224 million, and then in June 2015 its management announced plans to get out of the “select service” sector. While this in itself is not a major mistake, it shows the lack of focus the management of this company displays. While AHT is not in serious financial trouble now, that will change really fast if we fall into recession (and who knows when that might occur). We will be selling the AHT-D issue soon.
This sale moves our cash position in the Blended Income Portfolio up to 11.65%. We will be considering the sale of the issues mentioned above as well as our small holding in Realty Income (NYSE:O) as we have a rather large profit and the share price is extended to the upside. It is likely we will sell one of these issues per week for the next month, which will bring our cash position back toward 20% and position us for the next “panic” opportunity.
The Blended Income Model has skyrocketed in the last couple of months and we don’t believe that this performance is sustainable. But we hope experience and wisdom will help us maximize our performance.