Preferred Stock Buyers Beat High Prices By Paying Wholesale

Includes: NLY, O, PNC, PSA
by: Doug K. Le Du

Over the last two months there have been 13 new preferred stocks issued [1], 10 of which were introduced during July. In too many cases, by the time preferred stock investors knew of these new issues the market price had jumped well above par ($25 per share). The current (Friday, August 10, 2012) average price of these 13 new preferred stocks is $25.53, well out of reach for most risk-averse preferred stock investors who avoid paying more than the par value for their shares [2].

But in all cases preferred stock buyers could have purchased these new shares very near or even below their $25 par value [3].

Purchasing shares below their $25 par value is mostly a matter of taking advantage of how new preferred stocks are introduced to the marketplace. By doing so, savvy preferred stock investors have been able to make below-par purchases all year long while others have been paying much higher prices.

Review: How To Buy Newly Issued Shares For a Discount

At the beginning of this year the Seeking Alpha article titled "New Preferred Stocks: How To Buy Shares For A Discount Below Par" explained that during 2012 we would see preferred stock prices rise along with an increase in the number of new preferred stock issues. The article went on to describe how preferred stock investors are able to purchase newly introduced shares for less than $25 per share during these record-setting "seller's market" conditions.

To summarize, when a new preferred stock is introduced to the marketplace, a group of "underwriters" pools their cash and purchases the new shares from the issuing company. An application is filed with the NYSE (typically) at this time for a new trading symbol, a process that usually takes a couple of weeks. The underwriters receive a discount off of par, typically paying about $24.25 per share (this discounted price is published on page 1 of the prospectus; see PSA-U's prospectus for an example).

Anxious to get their cash back (and not at all interested in waiting until someone at the NYSE gets around to assigning a new symbol), the underwriters usually sell the new shares to dealer/brokers using a temporary trading symbol on the "Over-The-Counter" stock exchange (OTC) for about $24.50 per share. The dealer/brokers, now out the cash, are looking for buyers - any buyers - and will frequently accept buy orders below par (but above $24.50) as speed is critically important at this point in the process [4].

It is during this wholesale distribution of the new shares on the OTC exchange that you are usually able to make purchases at a discounted price, essentially taking part of the original $0.75 per share underwriter commission and putting it into your own pocket (see the January article for a more detailed explanation of this process).

Current Example: PSA-U from Public Storage

The strategy of purchasing newly issued preferred stock shares during OTC wholesale distribution works especially well during "seller's market" conditions, such as we have now, when there is a lot of upward pressure on prices.

Here's an example from a few weeks ago. PSA-U from Public Storage (NYSE:PSA) began trading on the OTC stock exchange on June 7, 2012 under the temporary trading symbol PSAML at a opening price of $24.50 (yellow diamond below).

OTC Trading Example: PSA-U

On June 18, the NYSE assigned the permanent symbol to PSA-U and the price closed that day at $25.19 (blue diamond). PSA-U closed last Friday, August 10, 2012, at $26.44 (gray diamond).

The NYSE is a retail market where investors are paying retail prices. Notice that once the NYSE assigns a new symbol (June 18 in this example) and the new issue starts trading there, the increase in visibility usually produces increased trading volume which frequently (but not always) results in a price increase. In today's "seller's market" for preferred stocks, prices for new issues have been jumping well above par as NYSE trading unfolds.

OTC Preferred Stock Buyer Results: June-July 2012

Over the last two months (June and July), savvy preferred stock investors have been able to purchase shares of newly issued preferred stocks for an average market price of $24.83 per share by taking advantage of this OTC wholesale trading strategy [5].

This chart shows three diamonds for each of the thirteen new preferred stocks issued during June and July - the OTC opening price (yellow diamond), the closing price on the first day of NYSE trading (blue diamond) and the current price (gray diamond, August 10, 2012). Note how these three price points for PSA-U are the same as seen in the first chart above.

13 New Issues, 8 Bought Below Par

With the exception of VNO-K and KIM-J, notice how the yellow diamonds (OTC opening price) occur at a lower market price than the blue diamonds (NYSE trading). And in eight out of these 13 cases, preferred stock investors were able to purchase their shares below $25 by using the Over-The-Counter stock exchange in the early days of trading.

OTC Strategy Works for All Industry Segments

By inserting yourself as a buyer during wholesale trading, you are taking advantage of how new preferred stock shares are distributed to the marketplace. So this strategy for purchasing newly issued preferred stock shares at a discount works equally well regardless of the industry segment that the issuing company is a member of.

Whether the new preferred stock shares are being issued by a manufacturing company, bank, real estate (REIT) or insurance company, the same OTC process is typically used.

For example, throughout this year we have seen new preferred stock issues from PNC Financial (NYSE:PNC) for 60 million shares (PNC-P, 6.125%) now trading for $27.98; Realty Income (NYSE:O) for 13 million shares (O-F, 6.625%) now trading at $27.71; and Annaly Capital (NYSE:NLY) for 11 million shares (NLY-C, 7.625%) now trading at $25.88. For these and most other new 2012 issues, preferred stock investors were able to purchase shares below $25 per share using this OTC strategy.

In today's very high priced market, preferred stock investors looking to purchase shares below their $25 par value should consider making such purchases during the early days of trading while newly issued preferred stocks are frequently available at a discount on the Over-The-Counter stock exchange [6].


[1] The following preferreds, issued during June and July 2012, have been omitted from this analysis as non-comparable to the others: two convertible preferreds (BZT, UTX-A) and one variable rate preferred (GAB-G).

[2] In the event that the issuing company redeems ("calls") your shares in the future, shareholders will receive the par value ($25) per share in cash. Those who avoid buying shares for more than $25 per share add a layer of protection to their principal plus set themselves up for a capital gain in the event of a downstream call.

[3] Source for all preferred stock data in this article: CDx3 Notification Service database, Preferred Stock Investing, Fourth Edition (see, TDAmeritrade. Disclaimer: The CDx3 Notification Service is my preferred stock email alert and research newsletter service including data for all preferred stocks and Exchange Traded Debt Securities traded on U.S. stock exchanges.

[4] There are occasional exceptions to this process. In some instances, the underwriters will hold the new shares until the NYSE assigns the trading symbol and not use the OTC exchange for wholesale distribution.

[5] As explained in last January's article, how well you are able to participate in OTC trading depends on the breadth of your broker's contracts with "market makers," of which there are about a dozen.

[6] Sources for OTC trading symbols: the CDx3 Notification Service (my subscription research service) provides OTC trading symbols for new preferred stock issues; QuantumOnline's site (, requests a fee on the honor system) does not provide email alerts but frequently lists the OTC symbol for new issues. For do-it-yourselfers, if you know the issuing company name (which you can get by watching the SEC's "Recent Filings" at you can monitor two sites for new preferred stock OTC symbols: (1) the OTC Bulletin Board at and (2) Pink Sheets at Do this daily if you want to catch them when they first start trading.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Preferred stocks identified within this article are for illustration purposes only and are not to be taken are recommendations.