Preferred Shares, How Much Is Too Much and Ford

Marc,

I have profitably enjoyed investing in your Oxford Income Letter portfolios since becoming an Oxford Club Member in early 2017. I now wish to diversify into preferred stocks. For Annaly Capital Management (NYSE: NLY) in the Retirement Catch-Up/High Yield Portfolio, do you also recommend the preferred shares – Annaly Capital Management 7.625% Series C Cumulative Redeemable Preferred Stock (NYSE: NLY-C)?

If not, do you have other specific preferred recommendations?

Thanks for your quality recommendations. – Tom

I am always looking for preferred shares to recommend, but it’s difficult in a rising interest rate environment.

Preferred stocks are like a hybrid between a stock and a bond. They are very interest-rate sensitive, and they typically fall when rates rise and rise when rates fall.

But preferreds have a disadvantage compared with bonds. Even though bonds are rate sensitive, you know that at maturity you’ll get the par value (usually $1,000) of the bond. Most preferreds don’t have a maturity date. So if you want to sell, you’ll receive whatever the market is offering. And that could be considerably less than you paid for it if rates are higher.

If you can find a preferred trading at a discount to its par value (usually $25 per share), you have a bit more of a buffer if rates go higher. So I’d recommend buying preferreds only if you can get a meaningful discount to par.

Hi, Marc.

How do I know if I am buying too much stock and at what amount it would have an impact on price action? I see the daily volume ranges from the hundreds of thousands to the millions. I’m sure if I buy a lot of a single stock, it would throw the price action off, but how do I know when it is too much?

Is there a rule of thumb as far as stock buying goes – like don’t buy more than 5% of a stock?

Also, is there is a registry to see who is buying what stock or to see which transactions are being made in real time by individual investors as a way to gauge how many people are watching a single stock?

Thanks. – Mudib

Unless you’re buying millions of dollars of stock, you don’t have to worry about buying 5% of a stock or even moving the price.

For example, Northwest Bancshares (Nasdaq: NWBI) is one of our smallest stocks. It has a market cap of $1.8 billion and trades an average of 411,000 shares a day.

To own 5% of the stock, you’d need to buy $90 million worth. And yes, that would certainly move the market. Even if you bought 5% of the average daily volume, that would be more than 20,000 shares equaling more than $350,000. And that would still likely not move the stock.

An individual investor doesn’t have to worry about moving the stock price in the kinds of stocks I recommend in The Oxford Income Letter. The stocks are too large to be moved by an individual or even collectively as a group. In some of the trading services where much smaller stocks are recommended, we sometimes see the price jump as hundreds or even thousands of investors pile into a stock all at once. But the stocks in The Oxford Income Letter are big and liquid, and they can easily absorb the buying activity.

As far as buying “too much stock,” you should never buy more than you can afford to lose or an amount that will cause you stress. If you’re ever losing sleep because of an investment, you should get out.

Lastly, there is no registry for real-time trades. Company insiders must file with the Securities and Exchange Commission within two days of buying or selling stock. Most of the financial websites show insider transactions, though they may not be up to date. You can also check the specific company’s investor relations page on its site for the most current insider filings.

Institutions must file a Form 13F within 45 days of the end of the quarter. So some information may not be up to date. For example, a company could buy 1 million shares of stock on January 2, sell it on April 2 and file its first quarter 13F on May 11. The 13F document would show a 1 million share position because the company sold it after the first quarter.

That being said, it is useful to see when a large or respected institutional investor is accumulating or dumping shares, even if it’s not up-to-the-minute information.

A free site that you can use to see what institutions are buying and selling is WhaleWisdom.

Marc,

Ford (NYSE: F) has a price-to-earnings ratio of 6, had an adjusted earnings per share of $1.59 in 2017 and pays 6.6%. It has been paying a dividend since 2012. Am I missing something by not including Ford in my portfolio? – Jim R.

Ford’s earnings declined in each of the past two years and are expected to slip again in 2018 and 2019. Free cash flow also fell in 2017 and is expected to drop again this year. In 2018, free cash flow won’t cover the dividend.

Until I see evidence of improvement in the financials – or have reason to expect one is coming – I’m going to stay on the sidelines.

For a more thorough analysis of Ford’s dividend safety, check out my Wealthy Retirement article from September here.

Hoping your longs go up and your shorts go down,

Marc