1. Bought 50 Shares of WPCS International (WPCS) at $3.8-Lottery Ticket (see disclaimer): I bought 50 shares in my regular IRA at $3.8. This one was bought based almost entirely on a P/S of .26 and a P/B of just .47, WPCS: Key Statistics for WPCS International, plus the recovery potential of this firm. I noticed it yesterday on the leading losers' list, where it declined 51 cents or 12.66% to $3.52 after releasing its earnings. The market cap is around 25 million, and YF has the consensus estimate at 33 cents for the fiscal year ending in April 2010 and 52 cents in April 2011. That estimate comes from just one analyst however. The revenue forecast is 121.25 million for the 2011 fiscal year or close to a Price to Sales of .2. WPCS did reaffirm its guidance yesterday for fiscal 2010 of earnings between 31 to 34 cents on revenues of 112 million: Reuters.com
Merriman Curhan Ford initiated coverage in late August with a Buy rating: Merriman I did not realize that brokerage was publicly traded until today, symbol MERR with a market cap of 17.5 million.
Earnings for the last quarter declined to 6 cents from 12 cents in the year ago quarter: Page 5 form10q.htm
WPCS is a design-build engineering firm. (see pages 23-25: form10q.htm) This is the link to Reuters' profile page: Reuters.com Backlog was 31.8 million as of 7/31/09 down from 54 million on 7/31/08. So it would be fair to say that the recession had an adverse impact on this small company. After bottoming around $2 a share in March, the stock did rally to $4 before the sell off yesterday, but still trading above its 200 day moving average. In 2007, prior to the onset of the recession, the stock was trading in the $10 to $14 range.
I placed this purchase, and the next one, in my regular IRA, so that I can include them in my next Roth Conversion in the event they go down significantly. That strategy worked extremely well in my Roth conversions between October 2008 and March 2009, where partial transfers to the Roth from the regular IRA were made at low prices, thereby reducing the tax bite, and then I allowed them to recover in the ROTH before selling. Many of these securities more than doubled after the date of conversion. I have now incorporated this strategy as part of my regular decision making process. If I want to buy a security in a retirement account, I will place the riskier securities in the regular IRA, which includes the next one discussed in this post.
2. Bought 50 Prospect Capital Corporation (PSEC) at 10.48 (see Disclaimer): I already own some shares of PSEC in a taxable account. My purchase today was in the regular IRA for the reasons discussed above. It is a BDC, Business Development Corporation, and I generally do not care for that particular type of corporation, though I have had some luck in trading them in the past. The reasons for my disfavor is that these companies frequently come to the market with new share issuances to finance themselves, and the some of the recent stock sales have been at a price less than net asset value of the assets. The reason why the firm needs capital has to with the tax requirement to pay out at least 90% of its investment taxable income to the shareholders as dividends. More can be learned by reviewed Prospect's recently filed annual report: sec.gov So as a result of that requirement, PSEC has a rich current dividend payout of over 15%. PSEC Fund Quote - Prospect Capital Corp Fund Quote
This is a link to Prospect's last earnings release: MarketWatch In that release, PSEC says the NET ASSET VALUE of its investments as of 6/30/2009 was $12.4. Its net investment income was reported at 12 million or 32 cents. It is in the process of acquiring another BDC called Patriot Capital (PCAP) which PSEC claims will be accretive to earnings by "at least" 9 to 10 cents a share. I am not that familiar with PCAP but I vaguely remember it had ceased to pay a dividend a few months ago, possibly due to a liquidity issue.
This is a link to the PSEC web site that lists the companies where PSEC has taken a position and a description of each position: Prospect Capital Corporation
3. Sold 100 GJK at $24.60 in Roth (See Disclaimer): GJK is a synthetic floater with a $25 par value which rose today to within forty cents of its par value, so it was sold. This security was bought in April for $19.83. BOUGHT 100 GJK IN ROTH Most of the potential return was connected to capturing the discount to par value at maturity in March 2014. The recent rise in this security to $24.6 gave me most of that return almost five years early so the gain was harvested.
4. Bought 50 BMLPRH at $13.83 (see Disclaimer): This is my third purchase this year of floating rate equity preferred securities issued by either Bank of America or Merrill Lynch originally. The other two were sold after a 50% or so pops earlier in the year after BAC made an offer to exchange those preferred shares into common shares. I am now searching for tax advantage yield anywhere that I can find it, which brought me back to the equity preferred floating rate securities. And I bought BMLPRH at a price today that would have been unappealing to me a few months ago.
BMLPRH is a security that originated with Merrill Lynch. Par value is $25. The coupon is paid quarterly at the greater of 3% or .65% above 3 Month Libor. Thus this security has some measure of inflation and deflation protection. Given the low short term rates now, the applicable rate is 3%, but that 3% is applied to the $25 par value. This translates into an annual yield of 5.357% at a $14 total cost. According to the quantum site the distributions are classified as qualified dividends currently: Preferreds eligible for the 15% Tax Rate Table - QuantumOnline.com I suspect that the current Administration will change these tax rules for those deemed well off by the Democratic Party. This security is currently rated junk.
The benefit to this type of security is that the rate will increase when the float above the 3 Month Libor rate produces a greater amount than the 3% guarantee. So, when interest rates start to move back up, and they will at some point, the floating rate will kick in when the 3 Month Libor exceeds 2.35% at the time provided for in the prospectus: Final Prospectus Supplement So if the Libor was 5%, then the rate would become 5.65% applied to the $25 par value which would result in a 10.09% yield to me at my total cost of around $14.
This security is not cumulative, which is a key disadvantage. It is also perpetual for the owner with a call option belonging to BAC. Moreover, even though it is classified as part of equity, there is no equity interest in the business, and the bond feature of this kind of security is its dominant characteristic. So, when I buy an equity preferred, I know that I only have my dividend, and nothing else. Sure, if BAC went bankrupt, I would stand above the common shareholder, but the reality is that both the common and equity preferred shareholders would be holding worthless securities in that eventuality.
I have a post that discusses the advantages and disadvantages of these securities: Advantages and Disadvantages of Equity Preferred Floating Rate Securities
The main protection for a continuation of dividend payments is the payment of a dividend on a Junior Security. The only security junior to an equity preferred is common stock and BAC is still paying a penny a share to its common shareholders. Also, the government is a holder of preferred securities and BAC would have to defer paying the U.S. in order to eliminate payments on its equity preferred shareholders, based on my current understanding of how these securities relate to one another.
In previous posts, I pointed out that there are several floating rate preferred issues where BAC is currently paying the distributions. While BMLPRH has the lowest guarantee at 3%, and a few others have better floats, I viewed BMLPRH to be the best value yesterday based on price. A 1% difference in the guarantee is worth just $25 per year for 100 shares. It would consequently take 4 years to recoup a $100 difference in price for 100 shares. The small difference in LIBOR would take much longer to recoup.
Item # 2 : My Limited Exposure to Junk Rated Issues
This is a link that explains what happened to the Merrill Lynch preferred issues after its merger with BAC: Merrill Lynch - Preferred Share Information BMLPRH is the old series 2 Merrill preferred.
5. Bought 50 USBPRH at $17.47 (see disclaimer): This security is a non-cumulative floating rate preferred issue from U S Bank. This equity preferred pays the greater of 3.5% or .6% above 3 month Libor. Par value is $25.
This is a link to the prospectus: e424b2
I do not know if the Quantum site has the current ratings on this equity preferred issue. But the ratings shown for Moody's and S & P are investment grade. Preferreds eligible for the 15% Tax Rate Table - QuantumOnline.com
At the present time I do not have any concerns about this bank that would cause me to worry about the elimination of the dividend.
I passed on this one when it was selling at $15 not that long ago.
6. Tidbits: I also sold all of the shares in one of my three mutual funds in the ROTH. This one was part of a ROTH conversion, as were the other two, and had gained a lot since the time of conversion. I now have too much cash in this account with a few other sales including GJK mentioned above. Possibly, at some time between now and the end of October, I may reinitiate a position in one of the double shorts for the treasury bonds as a partial hedge for my bonds in the retirement accounts. I made a profit on both TBT and PST earlier this year, but have no hedge in place for my bonds now.
I also bought some protection near the end of the day for my stock holdings in my taxable account.
7. Sold 100 VIMC at $3.5326-Lottery Ticket (see Disclaimer): What do I know about a Chinese semiconducter company? Nothing. I bought this LT based on the balance sheet, price to sales and price to book. I paid $1.97 which was less than the cash on the balance sheet. Lottery Ticket Purchase 100 of VIMC: EXTREMELY SPECULATIVE So, that is pretty good percentage return of about 75% annualized in four months.
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