Weekly Trading Opportunity: Preferred Stock CEFs

Summary

• Introduction of the funds that grabbed our attention.
• Statistical comparison between them.
• Trade proposal for those interested.

Note: This article was originally published for our subscribers on 4/3/2018 and some figures and charts may not be entirely up to date.

Introduction

After we have already gone through all preferred stock CEFs in our weekly review, we wanted to find ones which could present us with a trade opportunity. In this article we are going to show you our picks and build a short thesis as to why they might be of interest to us.

Statistical Comparison

Trade Proposal #1

Flah&Crum Pref Income Opps (NYSE:PFO) will be our first choice. This fund grabbed my attention because it is statistically undervalued, potentially undervalued - trading far below its net asset value, and it delivered to its holders one of the better returns on NAV for the past five years. The characteristics of this CEF make it a good ''Buy'' because it has everything that we could ask for:

^{Source: CEFConnect.com}

^{Source: CEFConnect.com}

^{Source: CEFConnect.com}

This chart allows us to track how the Net Asset Value and Market Price performed over the last five years. Now, we can clearly see that the fund has had the tendency to trade at a Premium, rather than a Discount. If we judge this by the picture painted by the aforementioned, it seems like PFO trading at a Discount has been a short-lived phenomena most of the time. Perhaps this time is different, or are we going to see history repeat itself?

Let us proceed with another aspect which deserves our attention, namely the Credit Rating of the underlying portfolio:

^{Source: CEFConnect.com}

As the data shows, this fund has 59.40% exposure to BBB-rated products and this means that we probably should have nothing to worry about in this respect. On top of that, the stocks in the portfolio are only from issuers located in the United States. So far so good. At least on a surface level there seems to be no red flags and we could consider adding this one to our holdings at least in the short term.

^{Source: CEFConnect.com}

Trade Proposal #2

^{Source: CEFConnect.com}

Statistically undervalued, traded at a discount and it boasts with one of the best returns on NAV among the preferred stock CEFs. Yes, this is Flah&Crum Total Return Fund (FLC).

^{Source: CEFConnect.com}

I am left with the impression that FLC has predominantly traded at a Discount over the 5-year time frame shown above. This is somewhat in contrast with our observation of PFO.

As per the Credit Rating of its holdings:

^{Source: CEFConnect.com}

There is barely any difference from the previously examined fund - predominantly BBB-rated securities which is probably something we will find in other closed-end funds invested in preferred stocks.

Here we see that compared to the PFO this fund has 77.10% of its assets from issuers in the United States. However, I do not think that this could be the decisive criteria to say which fund is better for a trade.

^{Source: CEFConnect.com}

^{Source: CEFConnect.com}

According to the data provided by CEFConnect, this fund has average daily volume of 31,000 shares. The liquidity of both funds is almost the same, therefore of no material impact to our choice.

Conclusion

In this article I barely scratched the surface of the two Preferred Stock Closed-End Funds which caught my eye, thus it is important to note that they only represent the 'best value' available among the funds in this group. And this does not mean that they are 'good to go,' but my view could serve as a introduction to further research if you agree with the arguments presented above.

Finally, I want to add that before we make a decision to enter any kind of trade we have to make a more detailed research of the instruments that we are going to trade.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PFO over the next 72 hours. 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.