Preferred Stock and Baby Bond Bargains Tough to Find
By: Tim McPartland,
While preferred stocks and baby bonds sold off quite significantly a couple of months ago those bargains are now gone and the continuation of redemptions of higher yielding issues continue.
On March 30th we wrote that the average preferred stock price which had hit a high of $26.25 and then proceeded to sell off to an average price of $25 before rebounding to $25.82. As we are writing this article the average preferred share (all $25 issues–not including convertibles) has climbed further to $25.96/share–just 1% off the all time high. No wonder bargains are tough to come by.
Patience is a word we have used often over the years. It is extremely difficult to be patient and await new issues that may have a bit of upside to them if you can buy them “wholesale”. The new issue marketplace has been slow during the month of May with just 2 new issues coming to market. 1 of the 2 issues which was sold was a Arlington Asset Investment (NYSE:AI) preferred that was composed of a measly 135,000 shares and never traded on the OTC Grey Market. The other issue was a GasLog Partners (NASDAQ:GLOP) fixed to floating rate preferred which came to market with a 8.625%. We were able to buy the GasLog issue at “wholesale” at $24.97–the issue is now trading at around $25.40/share 10 days later. We determined that the GLOP preferreds might have some capital gains shortly after shares began trading on the NASDAQ exchange based on a review of their very strong financials. Who wouldn’t want a 8.625% coupon of a financially strong company. It is true we are not fond of shipping companies, but hte LNG shippers, such as GasLog have had strong fundamentals and as long as crude oil remains above $40-$45 the LNG market should be strong (Asian countries in particular can burn crude oil or LNG and gravitate to the commodity which is most financially beneficial).
We have been carrying a 10-15% cash balance which has cost us some lost dividend/interest income and we finally accept that this is simply something we will have to live with. We will have cash available if bargains come up or new issues are sold that are acceptable to us. At this point in time we can’t imagine much other than fixed to floating rate issues being acceptable for purchase in the new issue arena. We would buy any of a wide selection of fixed to floating rate issues–even those that would appear to be ripe for a tumble with further Fed rate hikes. It has been simply amazing to watch New York Community Bancorp 6.375% fixed to floating rate preferred (NYSE:NYCB-A) trade up to $28.40 in 2 1/2 months, mREIT Two Harbors 8.125% fixed to floating rate preferred (NYSE:TWO-A) trade up to $27.16/share in 2 1/2 months and numerous other mediocre quality fixed to floating rate issues all trade higher. The 1 sector of fixed to floating rate issues that are NOT trading too much higher are some of the ocean shipping sector issues. Note that the financially strong LNG shippers are performing well as noted above.
So in summary we continue to wait patiently. It is only a couple weeks before we have another potential Fed rate hike and it is possible, although we think unlikely, that the a rate hike alone would cause too much dislocation of pricing in preferreds and baby bonds.