Preferred Stock - When is the right time to buy?

[tnathan]

Hi all,

 

I've been doing a lit bit of digging and came across some preferred stock that seems to interesting...it is ticker SIGIP. Trades at ~$17 vs. $25 par value, yields 6.8%. The non-preferred equity (SIGI) is relatively non-volatile and has done well (near an all time high).

 

What I don't fully understand about this is the expectation of price on the preferred equity (SIGIP). Would we expect SIGIP to revert back to $25 if interest rates go down at some point over the next 2-3 years? More broadly, is this a decent time to shop for on-sale preferreds to lock in both a strong yield and upside of price reverts to par?

[KPO]

3 hours ago, tnathan said:

Hi all,

 

I've been doing a lit bit of digging and came across some preferred stock that seems to interesting...it is ticker SIGIP. Trades at ~$17 vs. $25 par value, yields 6.8%. The non-preferred equity (SIGI) is relatively non-volatile and has done well (near an all time high).

 

What I don't fully understand about this is the expectation of price on the preferred equity (SIGIP). Would we expect SIGIP to revert back to $25 if interest rates go down at some point over the next 2-3 years? More broadly, is this a decent time to shop for on-sale preferreds to lock in both a strong yield and upside of price reverts to par?

I’m not familiar with this company, so I’ll make some general comments on preferred stocks and hopefully my ramblings will be helpful. I’ve bought a few recently and I generally try to: 1) buy preferred stocks in companies I know and like the capital structure, 2) have a view on the direction of rates, since they’re quasi-bonds (a view which is probably wrong in my case, but my view is the fed is unlikely to have more than 150bps of increases in them, mostly due to the simultaneous reversal of QE), and 3) identify companies that are takeout candidates and/or likely to call the preferred securities at par in the future, which is really a function of rates and overall business strength.

There are a few hospitality REITs that are interesting because they’re trading under replacement value, are sub-scale with good assets (so likely take out candidates) and have dropped enough that yields are attractive. I’d say the same for the Atlas preferred’s.  

BTW, this is a good site to give you some facts on the securities, including when they can be called at par: https://www.quantumonline.com

 

[tede02]

Preferreds are probably more similar to junk bonds than equities. Interest rates and credit risk are the big factors which determine any discount/premium to par. One investment I made in recent years that I think is going to work well is Seritage preferred. Everyone has debated the value of the common. As long as the common is worth at least zero, I'll get paid out at par. I bought at a discount so I'm getting >9% along the way. I'd have to check my notes but if I get paid out at par by the end of 2023, I think my IRR will end up around 20%. I find preferreds interesting. They are generally less liquid and therefore less followed. This is probably the type of environment where some very attractive opportunities exist. If interest rates do come back down, that will be a big help.