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|In This Issue...|
Just Published: The Third Edition of Preferred Stock Investing is now available!
The Third Edition of Preferred Stock Investing includes all of my latest research regarding the market price behavior of high quality preferred stocks. Five new chapters and 70 additional pages use real preferred stocks to show you how to screen, buy and sell the highest quality issues, even during a Global Credit Crisis.
Chapter 15 lists all qualifying preferred stocks that have been issued since January 2001 and shows you how you would have done by using the investment method described throughout the book for each one. And the book includes all of the web sites and other resources that are used to implement the CDx3 Income Engine on your own.
The Third Edition of Preferred Stock Investing, the manuscript of which was reviewed by several dozen readers and subscribers before going to the publisher, is my most comprehensive work yet and it is now available at your favorite online retailers (see retailers).
I research the market price behavior of the highest quality preferred stocks and write to you about my observations. During June 2009, thirty of the highest quality preferred stocks ("CDx3 Preferred Stocks") reached a point where, my research shows, their market price will tend to favor buyers.
The Last Month's CDx3 Investor Results article below shows you a three step analysis that I performed in order to further narrow down the list to just those preferred stocks that "The Market" has underpriced, given the investment risk involved with each issue. The result was eight specific high quality preferred stocks that are selling for bargain basement prices right now.
If you subscribe to my CDx3 Notification Service (what's this?) and later change your mind, I am offering a money back guarantee as described in the Special Announcement article. This announcement formalizes a policy that I have had since I started the CDx3 Notification Service several years ago. The features and benefits of the CDx3 Notification Service need to support your investment objects; if you decide to go a different direction, you're covered.
In the CDx3 Company Spotlight article I introduce you to one of the few Real Estate Investment Trusts (REITs) that some say is not only more protected from this recession than most others, but is also currently undervalued. Meet healthcare giant HCP, Inc. Last year, HCP became the first healthcare REIT to be included in the S&P 500 and is an issuer of CDx3 Preferred Stock.
The CDx3 Question of the Month uses a new feature that I hope you will find both educational and fun to use. Starting this month, the CDx3 Question of the Month is also posted on the Preferred Stock Investing Reader's Forum just before this CDx3 Newsletter is sent to you. If you visit the Forum you can test your knowledge by clicking on your answer to the question. You will receive an automatic email that provides you with the correct answer and my explanation. Or you can just read the answer in the below CDx3 Question of the Month article, but that's not nearly as interesting.
I am committed to making certain that readers understand how the CDx3 Income Engine (the preferred stock investing method described throughout my book, Preferred Stock Investing) is being used during this credit crisis. In the Free Special Offer article below I am providing you with a free downloadable copy of my Quick Guide To Preferred Stock Investing During A Global Credit Crisis. This Quick Guide provides you with a summary of how to use the highest quality preferred stocks to earn above average dividend income while simultaneously creating multiple downstream capital gain opportunities.
Coming Up For Preferred Stock Investors: The stress tested Big Banks are implementing their capital generation plans this month. Importantly, not one share of CDx3 Preferred Stock is being required to convert to any bank's common stock and all CDx3 dividends remain unscathed as well. Citi's historic preferred stock conversion is voluntary and will be completed by the end of the month. The CDx3 Selection Criteria (Preferred Stock Investing, chapter 7) have successfully filtered out the preferred stocks from every failed bank since this Global Credit Crisis began two years ago.
Citigroup is as confused as anyone else regarding the effect that its massive July preferred stock conversion is going to have on its common stock price. To hedge their bets, Citi has filed with the SEC to perform a reverse stock split after the conversion. The odd thing about the filing is that, rather than specifying the reverse split ratio as one would except, it provides a menu of seven alternative split ratios for Citi's Board of Directors to pick from, or not. If you are wondering what Citi's massive preferred stock conversion program is going to do to its common stock price, you're not alone. The conversion will be a done deal by the end of July.
I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
Eight CDx3 Preferred Stocks Are Underpriced By "The Market"
Three Steps Show Preferred Stock Investors How To Find Them
In the world of investments, two preferred stocks that have the same investment risk should be priced by "The Market" such that they provide the same yield to investors. But there are times when The Market acts on emotion (fear or elation), rather than the cold hard facts, when evaluating investment risk. Sometimes The Market can punish a preferred stock more than it deserves and set its market price lower than the investment risk really warrants. The trick, of course, is finding those bargains.
The analysis that I am about to show you (from pages 137-142 of Preferred Stock Investing) allows preferred stock investors to (1) identify the highest quality preferred stocks, (2) whittle the list down even further to just include those issues that are at a point in time that tends to favor buyers and then (3) identify just the specific preferred stocks that The Market has underpriced.
Step 1: Identifying The Highest Quality Preferred Stocks
The ten CDx3 Selection Criteria presented in chapter 7 of Preferred Stock Investing eliminate about 90% of the currently trading preferred stocks and leave you with just the highest quality issues. See the side bar at the top of this newsletter (under "What Is A CDx3 Preferred Stock?") for three examples of the criteria that ordinary preferred stocks must meet in order to be considered "CDx3 Preferred Stocks." The complete list can be found on page 113 of Preferred Stock Investing.
Step 2: Issues That Favor Buyers
Preferred Stock Investing derives four criteria that allow you to identify CDx3 Preferred Stocks that are at a point in time that tends to favor buyers (see page 160). Using these four criteria on June 30, 2009 resulted in a list of 30 CDx3 Preferred Stocks, each of which is represented by a diamond on Chart 1. The chart shows you the declared annual dividend rate that each one pays and its closing June 30 market price. Notice how the preferred stocks that pay a higher dividend tend to command a higher market price - no surprise there.
But also notice that this is not always the case. There are several cases where you can see preferred stocks that pay the same dividend rate that have vastly different market prices. Looking across the 8% line, for example, you can see two preferred stocks that both pay an 8% annual dividend, but one is priced at $18.63 per share while the other is selling for $22.20. The reason for this disparity, of course, is that The Market believes that one of these carries more investment risk than the other.
Step 3: Identifying Underpriced Preferred Stocks
Chart 2 shows you the current (June 17, 2009) investment risk of these same 30 CDx3 Preferred Stocks, as evaluated by Moody's Investors Service (for better or worse, the ratings from rating agencies such as Moody's remain the individual investor's only available rating of a security's investment risk). All 30 are rated "investment grade" by Moody's and fall into one of the five Moody's investment grade sub-categories seen on Chart 2 (A1 through Baa3).
As mentioned earlier, preferred stocks that have the same investment risk should be priced by The Market such that they have the same return (yield) to investors. The diamonds on Chart 2 should stack right on top of each other (or close to it) for any given risk category. By looking at Chart 2, you can clearly see this mechanism, except at risk categories Baa2 and Baa3. The Market is confused about how to price the preferred stocks in these two investment grade sub-categories.
And therein lies our opportunity.
For example, Moody's is saying that of our 30 CDx3 Preferred Stocks that are at a point in time that tends to favor buyers, seven of them are at the Baa2 risk level. But The Market has priced one (indicated by the silver diamond) such that it provides a yield of 8.75% while another (the gold diamond) is priced by The Market such that it provides its investors with a 10.75% yield. That's two whole percentage points difference for two investments that have, according to Moody's, the same investment risk. Either The Market has overpriced the silver preferred stock (driving its yield down) or underpriced the gold preferred stock (driving its yield up). But which is it?
Chart 3 is the same as Chart 1 except that I have added a very important piece of information. The average yield of these 30 CDx3 Preferred Stocks is 9.3%. The preferred stocks that provide their buyers with a 9.3% yield can be said to be competitively (properly) priced by The Market. In other words, 9.3% is the "going rate" for these CDx3 Preferred Stocks.
Notice on Chart 3 how the silver preferred stock, selling for a market price of $20.00 per share, falls almost exactly on the 9.3% yield line. This preferred stock is being properly priced by The Market.
Now notice that there are eight preferred stocks that fall well above the "going rate" line, including the gold preferred stock, at $18.63 per share. Since, according to Moody's, both the silver and gold preferred stocks have the same investment risk and because the silver preferred stock is priced such that it falls very close to the current "going rate" of 9.3%, we can conclude that the gold preferred stock is currently underpriced by The Market. The level of investment risk carried by the gold preferred justifies a market price of $21.50 ( ($25 x 8%) divided by 9.3%); not $18.63.
The Market has underpriced the gold preferred stock by $2.87 per share.
At the end of every month, subscribers to the CDx3 Notification Service receive the CDx3 Bargain Table. The table lists CDx3 Preferred Stocks that are a point in time that tends to favor buyers (see Preferred Stock Investing, page 160). The preferred stocks shown on each month's table are grouped by Moody's rating and the average "going dividend rate" is also calculated and presented. By looking at the preferred stocks listed within a given Moody's category, the ones that have a yield greater than the presented average are underpriced by The Market as illustrated by my above analysis. We do the research and calculations; subscribers make the decisions. Shouldn't you be benefitting from this type of preferred stock research and analysis? Please consider subscribing to the CDx3 Notification Service today.
Money Back Guarantee For CDx3 Notification Service Subscribers
Explicit, Written Guarantee Protects Preferred Stock Investors
70 million Americans started retiring last year and high quality preferred stocks, in my view, are underrepresented to this group. After researching preferred stocks for many years, I firmly believe that they can represent a very attractive investment choice for many individual investors.
In the face of the research data presented in chapter 15 of Preferred Stock Investing, I think that my position on this point is pretty hard to argue with.
The CDx3 Notification Service is, by far, the most comprehensive information resource for the highest quality preferred stocks available anywhere.
But I understand that your investment plans can change over time. So I wanted to be sure that you understand that if you subscribe to the CDx3 Notification Service, but later feel like you need to take a different direction, you're covered. Any unused portion of your annual subscription fee to the CDx3 Notification Service will be promptly refunded to you. I guarantee it.
The latest research, continual updates on preferred stocks and market trends, advance notification of buying and selling opportunities of just the highest quality issues and much more. But if you decide that the CDx3 Notification Service is no longer for you, no problem. You will receive a prompt refund of the remaining portion of your subscription fee and our best wishes.
While most subscribers are individuals just like you, all of the biggest, and many of the smallest, investment firms in the United States subscribe to the CDx3 Notification Service. If you want to start adding the highest quality preferred stocks to your portfolio, while we do the research and calculations for you, maybe it's time that you joined them.
Who Are These Companies That Issue CDx3 Preferred Stocks?
HCP, Inc. (NYSE: HCP)
HCP, Inc. was founded in 1985 and is a $5.1 billion Real Estate Investment Trust (REIT) that invests in healthcare-related facilities located throughout 43 states. HCP owns about 700 healthcare facilities valued at over $13 billion and is headquartered in Long Beach, California.
REIT's can represent an attractive opportunity for investors since, in order to avoid most corporate taxes, they must distribute at least 90% of their taxable income as dividends. Healthcare is also seen as more recession proof than many other industries since the need for it is not as optional as other consumer expenses might be.
But since REIT's, by definition, make money by investing in real estate, they are dependent on the availability of credit - bad news during a Global Credit Crisis. Overall, many REIT's have been hammered along with banks for almost two years now. But HCP may represent an exception to some investors. A June 16, 2009 CNN Money interview with Richard Anderson, a senior analyst at BMO Capital Markets, put it this way:
"...But among the wreckage are REITs whose prices have been unfairly hammered. In general, Anderson argues, those that specialize in healthcare facilities and apartments offer the safest bets, with average dividend yields of 7.8% and 8.5%, respectively. Healthcare REITs have endured as demand for medical care continues even in bad times.
Anderson recommends HCP (HCP), Health Care REIT (HCN), and LTC Properties (LTC), with yields of 8.8%, 8.2%, and 8.6%, respectively. HCP and Health Care REIT are diversified; they own nursing homes, medical office buildings, senior housing, assisted-living facilities, and hospitals. That means the companies won't collapse if one segment turns sour."
And during 2008, HCP became the first healthcare REIT to be added to the S&P 500. You can see a photo gallery of a small sample of HCP's healthcare facilities by clicking here. HCP's 2008 Annual Report is available by clicking here.
HCP, Inc. is an issuer of CDx3 Preferred Stock.
Which preferred stock is most likely to be called first? - Preferred Stock Investing Reader's Forum.
In most cases, five years after a company issues a preferred stock they regain the right to buy it back from you, at $25.00 per share. Doing so is referred to as a "call." And, with 91% accuracy, there is a way to tell, in advance, if they are going to do so.
...New Forum Feature This Month - Test Your Knowledge
But before I dive into this question, I am introducing a new feature to the Preferred Stock Investing Reader's Forum this month just for fun. Starting this month, I will post the CDx3 Question Of The Month on the Preferred Stock Investing Reader's Forum (the Forum is free to you, no password required) for you to look over. When you click on your answer to the question (multiple choice), you will receive an automatic email message that provides you with the correct answer and my write-up explaining the answer.
If you want to test your knowledge about preferred stocks, go to the Preferred Stock Investing Reader's Forum and scroll down on the right side to the feature "Surveys, Questions - Test Your Knowledge." There, you will see this month's question. Just click on the question to test your knowledge.
If you do not want to spoil it, go to the Forum now then come back after you've clicked on your answer before you read any further here.
Here is the answer to the question "Which of the following preferred stocks is most likely to be called first?"
(a) HE-U (6.500%,
The answer is (b) HPT-B.
Here's why: Let's eliminate (c) right away. CDx3 Preferred Stocks, including BBT-A, have a five year life span (IPO date to call date). Since BBT-A was issued on 9/4/2008, it has yet to reach its call date on 9/13/2013. The issuing company of a preferred stock is not allowed to call (buy back from you, at $25 per share) a preferred stock until it has reached its call date so the answer cannot possibly be (c).
We can also eliminate (a) HE-U. Even though HE-U has reached its call date (3/19/2008), its declared dividend rate of 6.5% is too low to motivate its issuer, Hawaiian Electric Company, to call it. Companies usually finance the call of an older preferred stock by issuing a new one at a lower dividend rate, then use the proceeds to call (buy back from holders at $25 per share) the old issue. But the dividend rate on the new issue has to be lower than the rate on the old issue; that is, they have to be able to save money by doing the call or no go.
HE-U is costing Hawaiian Electric 6.5% per year; issuing a new preferred stock in order to generate cash to call HE-U would currently cost Hawaiian Electric about 9%. Hence calling HE-U is not likely to pencil out any time soon.
HPT-B, issued by Hospitality Properties on December 6, 2002, has a call date of December 10, 2007. Note that this call date has passed so HPT can "call" (buy back from holders) this preferred stock any time they want at this point (for $25 per share).
HPT-B is costing Hospitality Properties 8.875% per year in dividend payout expense. That's very expensive for a preferred stock, although current rates are even higher. But as soon as current rates fall below 8.875%, HPT will be able to save money by (a) issuing a new preferred stock at the then-lower rate and then (b) using the proceeds from that new issue to call HPT-B.
How much below 8.875% will rates have to fall before HPT is likely to call HPT-B? If a company can save at least .375% in dividend expense by introducing a new preferred stock and using the proceeds to call an old one, they will do so 91% of the time (Preferred Stock Investing, page 217).
Looking at the lists of preferred stocks from Chapter 15 of Preferred Stock Investing, you can see that HPT-B has the highest dividend rate of any CDx3 Preferred Stock that is now callable (has reached its call date) and it has yet to be called. Therefore, HPT-B is the most likely preferred stock, among those listed, to be called first.
You can submit your own preferred stock question. If your question is used as the CDx3 Question Of The Month you will receive a free copy of the CDx3 Special Report "Dividend Accounting."
Many CDx3 Newsletter readers have been with me for quite some time. And from the email that I receive I know that many of you have read Preferred Stock Investing and have implemented the CDx3 Income Engine on your own (the book includes all of the resources needed to do so without the CDx3 Notification Service).
The 24-month long Global Credit Crisis has shaken our financial system and everyone who is invested in it (which is just about everyone). Even though the CDx3 Selection Criteria, day after day, have successfully filtered out the preferred stocks from every failed bank for two years now, and even though there has not been so much as a missed dividend for those who have invested in CDx3 Preferred Stocks, there's still some anxiety.
And that's what concerns me the most. As a researcher, I have an enormous volume of data regarding the market price behavior of CDx3 Preferred Stocks.
I can not only explain this market price behavior but I have the data needed to support my observations. Chapter 15 of Preferred Stock Investing includes the investment results, using the CDx3 Income Engine, for every qualifying preferred stock issued since January 2001.
Whether market prices are driven down by uncertainty related to war (2002) or by a Global Credit Crisis (2007-09), the market prices of CDx3 Preferred Stocks behave in certain ways at certain times.
To thank you for your interest, and to provide you with some very timely insights, I have published a "Quick Guide To Preferred Stock Investing During A Global Credit Crisis."
This is an important and timely document that all who are interest in using the highest quality preferred stocks to benefit from this credit crisis should read. Understanding the CDx3 Income Engine is more important now than ever.
Enjoy reading the Quick Guide and thanks again for your interest in my preferred stock research.
Historic Preferred Stock Conversion Gets Underway At Citi
Stealth Filing With SEC Shows Citi To Be As Confused As Investors
It will be hard to ignore Citigroup's historic conversion of its preferred stocks to common stock during July. Those of you who own Citi preferreds should have received an information package on, or about, July 1 from your broker. The good news is that the package is complete and thorough; the bad news is that it was mostly written by lawyers for lawyers.
If you have questions regarding Citi's preferred stock conversion program contact your broker. Many brokers have received special information guidance from Citi and some have even set up special groups to assist clients who call in with questions. You should be able to get most of your questions answered by calling your broker.
The expiration date of Citi's offer is Friday, July 24. But Citi recommends that, if you decide to convert your shares, that you declare your intention to do so at least five business days prior. If you volunteer to convert your Citi preferred shares, be sure to do so (in accordance with the process explained in the information package) by the close of business Friday, July 17, 2009.
And remember, there is no guarantee that, even if you volunteer, your shares will be accepted for conversion by Citi. Their goal is to convert a specific dollar amount of preferred stock shares under this program and they are going to do so in priority order until they reach that dollar amount. Your trust preferred stock dividends will continue to be paid if you choose not to convert.
After Citi has the list of volunteers together, they will sort the list by preferred stock issue according to the conversion priority that they have already announced. The whole deal will be done within six days. If you accept Citi's invitation to convert your shares and if Citi then accepts your acceptance (so to speak), on Monday, August 3, 2009, you will find a whole pile of Citi common shares (7.3 times as many preferred shares that you owned) sitting in your brokerage account (trading symbol: C).
Also during July and August you are going to hear a great deal of hubbub regarding an aspect of Citi's conversion that has received very little press coverage. Everyone, including Citi, knows that converting all of these preferred shares to common shares is unlikely to make the common stock price go up. The opposite outcome is more likely, not to mention the pounding that Citi shares have taken over the last couple of years; but no one really knows for sure - not even Citi.
So, Citi has filed with the SEC to perform a reverse stock split just after the conversion. Companies will perform a reverse stock split if they feel embarrassed by the low market price of their common stock. Nothing really changes for those holding the stock, but for new buyers the stock's price is higher than it use to be. Instead of a stock selling for $1 per share, a reverse split will set the new price at, say, $10 per share but current holders will notice that the number of shares they own has simultaneously been reduced by a factor of 10 (in this example) as well. Instead of owning 100 shares at $1 per share, holders after a reverse split will find that they own 10 shares at $10 per share. Same total value, except the stock is now selling for $10 for new buyers rather than an embarrassing $1.
The strange thing about Citi's reverse split filing is that it does not actually specify the ratio for the split. Rather, the filing authorizes Citi's Board of Directors to execute a reverse stock split, or not if they so choose, by picking for any one of seven listed alternative ratios - a menu of reverse split choices.
Citi obviously suspects that their July preferred stock conversion could push its common stock price way down to some embarrassingly low level (when compared to other Big Bank stocks). But we can see by this filing that they are as confused as the rest of us as to how much that reduction might be, if at all.
So if you find yourself wondering what is likely to happen to the market price of Citi's common stock after this historic preferred stock conversion is completed, you're not alone.
By the first week of August, we'll know the answer. And I will report back to you in next month's issue of the CDx3 Newsletter.
to screen, buy and sell the highest
quality preferred stocks by
the third edition of my book, Preferred
Stock Investing (see
retailers). The book identifies
the resources that you need to be a very
successful CDx3 Investor completely on
your own. If you would rather we do the
research and calculations for you I
CDx3 Notification Service.
15 of Preferred Stock Investing
includes a list of all of the CDx3
Preferred Stocks issued since January
2001 and the investment results you
would have achieved had you invested in
them using the CDx3 Income Engine.
readers also receive free periodic
updates to the preferred stock lists in
chapter 15 as long as the Third Edition
of the book is in print.
take a look at
And if you
someone who might be interested in simple
experts please have them send an email
they will automatically
begin receiving this monthly CDx3
next month (plus a
CDx3 Special Report) - all FREE.
Chapter 15 of Preferred Stock Investing includes a list of all of the CDx3 Preferred Stocks issued since January 2001 and the investment results you would have achieved had you invested in them using the CDx3 Income Engine.
And readers also receive free periodic updates to the preferred stock lists in chapter 15 as long as the Third Edition of the book is in print.
Please take a look at www.PreferredStockInvesting.com. And if you know someone who might be interested in simple investing for non-investment experts please have them send an email message to:
and they will automatically begin receiving this monthly CDx3 Newsletter next month (plus a CDx3 Special Report) - all FREE.
Many Happy Returns,
Doug K. Le Du
Copyright (c) 2009 by Doug K. Le Du
CD Times 3, CDx3, CDx3 Income Engine, CDx3 Investor, CDx3 Portfolio, CDx3 Preferred Stock, CDx3 Perfect Market Index, CDx3 Bargain Table are trademarks of Doug K. Le Du. All rights reserved.
Company logos are trademarks of the indicated companies. Service Marks (SM) are service marks of the indicated companies.
DISCLAIMER: The content of this CDx3 Newsletter is to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be discussed herein. Consider your financial resources, goals and risk tolerance before investing. You, and not Doug K. Le Du, are solely responsible for your own investment decisions.