I'm certain that my followers are quite familiar with the title of this article. They've seen me use it on many occasions, mostly in the comment sections of my articles. Especially when I'm responding to my naysayers who complain that I'm a lightweight who never bothers to dig down into the numbers, e.g. the financial statements and balance sheets. Regretfully, they are correct. However, it's not because I'm lazy, although I tend to be, no, it's because I really don't feel that I am qualified to interpret them sufficiently to arrive at the correct conclusion about a company's future profitability. Certainly not enough to pontificate about them to my followers. It happens to be the primary reason I began investing primarily, and then almost virtually in all cumulative preferred fixed-income securities. I do this because I found that it is considerably easier to determine the future viability of a company than to predict its profitability over the next quarter or the next few years.
And past is prologue is the way I have found to best accomplish this. Complain as some might and on occasion do, I have prospered utilizing this simple yet effective method of determining the future viability of companies that I have considered making a preferred or note investment in.
Serendipitously, when I began investing in preferreds, it was at the very bottom of the market crash. I had recently learned about them and after extensive research decided that given my lack of financial acumen, preferred investing would level the playing field and allow me to compete more successfully with what I had come to realize were more knowledgeable investors than I ever hoped to be. However, I did know about hotels, their RevPar, revenue per available room, and occupancy rates. I also reasoned why many were facing a great deal difficulty, which was directly related to the market crash. I knew that people who normally vacationed and those that scheduled company meetings and trips had canceled them as a result of the trillions of dollars that had recently been lost. I also realized that eventually, the world governments would have to act to avoid another great depression. And if this were to happen, the market and eventually the world's economy would bounce back. When that happened, I was certain, people would take those delayed and necessary vacation after the stressful patch they had recently suffered through. The only thing I didn't know was how long it would take for the recovery to begin. In retrospect, I realize the huge gamble I had taken when I invested whatever remained in my investment account and began buying the preferreds of primarily hotel and lodging REITs. Ashford Hospitality (AHT), Felcor (FCH), Strategic Hotels (BEE), Hospitality Properties (HPT), Sunstone Hotels (SHO), and others I can't recall immediately. I do recall that FCH and BEE had recently suspended their preferred dividends and were trading in single digits. With what I had recently learned, I knew that if they survived so would I and I would recover most of the money I had lost in the crash. Their survival was the key, that was what I was betting on and as far as I was concerned, that was all I needed to know. They did and I did, and within a year I had transformed an approximate $650,000 loss into an approximate $600,000 gain by March of the following year, 2010.
Not only had I recouped my losses, but at the same time, I had discovered my path to prosper in the market. Wrong or right, I believed then as I do now, as a cumulative preferred investor all I really needed to know would be the immediate and long-term viability of companies I intended to invest in. Additionally, I reasoned, the best way for me to determine that, given my limited accounting skills, was to look at each company's past historical performance by its share price history. No more spun conference calls or the complicated financial statements and balance sheets that I could barely decipher or understand.
I recalled how the giant General Motors (GM) had gone bankrupt after sustaining years of losses. I further reasoned that companies that were profiting, and had profited, rarely if ever went bankrupt. For me, it was as simple as that. You can lie about the present and spin the future, but you can't lie about or spin the past performance of a company, which was evident simply by the performance of its common stock price over the past few years. As far as I was concerned, past would be prologue. Those companies that had performed well in the recent past and were actually earning rather than losing money, were least likely to go bankrupt. To determine this, I turned to Yahoo Finance charts and the Finviz financial highlights of each company I was interested in making a preferred investment in.
I also knew that hospitality and lodging REITs were not large and diverse enough preferred markets to invest all my money in and that I need to expand to other sectors of the economy that issued preferreds that offered high enough yields to attract my interest. As the economy recovered, those ridiculously high yields I had grown accustomed to during 2009-10 were rapidly falling. My research led me to several other sectors that I found attractive: mREITs; transportation, mostly shipping; storage; and oil and gas E&P's and pipelines, which initially helped me profit wildly until the end of 2014 when the price of oil suddenly plummeted from $115/barrel to the mid-twenties the following year.
With the mREITs I learned another valuable lesson, in spite of poor performance of their commons, their preferreds usually profited their shareholders even though their prices might have fallen as well. I state this because their dividends were most often neither cut (because they could not be cut) nor suspended when this occurred.
The following are just a few of the companies of the above-mentioned sectors I have held and hold preferred investments in:
- mREITS: Armour Residential REIT (ARR), Resource Capital (RSO), RAIT Financial Trust (RAS)*, NY Mortgage Trust (NYMT), and AG Mortgage Investment Trust (MITT).
- Shipping: Navios Maritime Holdings (NM), Safe Bulkers (SB), Global Ship Lease (GSL), Tsakos Energy Navigation (TNP), Golar LNG Partners (GMLP) and Teekay Offshore Partners (TOO).
- Oil & Gas E&P's: Several are now regretfully bankrupt, but I still hold my long-time favorite Gastar (GST), Callon Petroleum (CPE), and the ruins of Legacy Reserves (LGCY).
- Oil & Gas pipelines and storage: I have held Kinder Morgan (KMI) but have sold it because of it mandatory conversion clause set to take effect next year.
- Storage: General Finance Corp. (GFN), National Storage Affiliates (NSA), and Public Storage (PSA)
* I will speak of at length in the following article of this series.
In Part II of this series, I will further explain the rationale and allow you a more detailed look at the way I go about utilizing my past is prologue approach to preferred investing.
Disclosure: I am/we are long AHT-G, ARR-B, RAS-B, RAS-C, NYMTO, MITT-B, NM-G, NM-H, SB-D, GSL-B, TNP-D, GMLPP, TOO-B, GST-A, LGCYO, GFNCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.