WASHINGTON, November 17, 2016 – Trading has been treacherous over the past two days. So as market action draws to a close this Friday afternoon, we find ourselves mostly standing in place waiting for a sign that the Trump rally has either stalled or drawn to a close already; or if it’s just taking a rest before heading up again in a fierce Santa Claus Rally, the kind of action we most certainly did not see as 2015 drew to a close.
Some sectors like banks and materials are already benefiting from the frantic action over the past few trading days. Others, like pharmaceuticals, techs and companies involves in the oil patch, are not. What to do, what to do? Well, we’re mostly holding for now.
We’ve been pleased with new positions we established post-election in the left-for-dead stock of Bank of America (symbol: BAC) and are even happier with another position we took in a fairly obscure regional banking stock, Atlanta-based Fidelity Southern (LION), which is already up a whopping 7.5 percent in just a week. We hope this holds, at least for a while.
Other more speculative stocks in the financial universe, like our current holdings in Blackstone Group (BX) and KKR (KKR) have been gyrating more wildly and less predictably, but they’re also generally on track to stay in the black while generating more green.
We also picked up a position in an excellent but unfairly beaten-down utility, the Houston-based Centerpoint Energy (CNP) a high-dividend stock we’ve been in and out of before. When interest rates are likely to go up, it’s not only bonds that get hit. Bond-like investments, most notably high-dividend utilities, also get sold off. Hard. CNP was no exception, and the downside worsened last month after the company reported a subpar quarter.
But for CNP, such an off-quarter is usually just an anomaly, and we think that’s the case here. Plus, that dividend of approximately 4.4 percent at the stock’s current price looked good to us. Hence the buy, even though we expect the utilities to remain weak likely through at least the end of 2016. On the other hand, the shares jumped up nicely after we bought them yesterday, though they’re off a bit today. This will likely remain a long-term hold, so we won’t worry about daily fluctuations, at least for now.
Temporarily damaging to our portfolios, however, is our YUGE position in Allergan convertible preferred A stock (AGN/PRA, your symbol may vary) finally seems to have found a bottom at around $700+ dollars per share. It firmed on Tuesday and again on Thursday but struggled to stay on the plus side as of Friday noon. It’s currently sitting at $718 and change, off $8.78 per share thus far.
Currently yielding in excess of 7 percent, there’s been no reason for these shares to tank as violently as they have over the last two or three weeks—except that they are potentially convertible into Allergan common stock (AGN), which continues to get pancaked after reporting notably atrocious non-earnings in the most recent quarter. This, of course, makes the convertible value of AGN/PRA decline in tandem, given that you could redeem one share of AGN/PRA for almost 3 shares of the common.
But the real question is this: given that AGN/PRA will be redeemed at par value ($1,000) on March 1, 2018, why would you even think to convert your preferred shares at this point? Five fat dividends ($13.75 per share owned) have yet to be paid off before this stock is retired, so why give these dividends up by selling, perhaps at a loss?
Our average purchase price at this point is $813 per share, so we’ve been clobbered on this latest buy move to be sure. But unless AGN (a pharmaceutical giant perhaps most famous for Botox) goes bankrupt—massively unlikely—why dump shares during this absurd downdraft and end up missing out on the impressive capital gain we’ll get when those shares are retired in 2018?
A further plus here, BTW, is that when such a transaction occurs, there’s no commission because there’s no trade. So what’s not to like? Patience will be a ultimately be a virtue here, although in the current market, that’s often not the case.
Yet we are beginning to wonder whether, at long last, we’ll finally be able to return to something we used to do before the stock market fell apart in 2007-2010: become buy-and-hold stock pickers, once again finding value and timing clues in fundamental and technical analysis rather than battling against high-frequency trading firms that initiate massive (and sometimes fake) buy and sell orders based on rumors and news headlines.
Have a good weekend.