Observations and Sample of Recent Trades: COTY, FNB, GMREPRA, PNNT

Bloomberg.com has transitioned to a high price subscription website. After a $9.99 per month introductory period, access will cost $39.99 per month. Home-Bloomberg Subscriptions 

While Bloomberg is a worthwhile financial news site, it is not worth $40 per month IMO. I may subscribe when and if I win over $100K on a scratch off ticket. The only subscription that I now have is for Barron's. I got rid of the WSJ and Morningstar. I view Barron's as way over-priced for its skimpy content and will probably cancel it. 

I read a story about a brokerage company that provides commission free trades using a mobile app. How commission-free trading app Robinhood tries to make money: CNBC; Robinhood - Invest for Free I may give it a spin when I run out of commission free trades at Fidelity. 

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Economy: 

Calculated Risk: Merrill: "Retail spending stalls again"

The Cleveland Fed's Median CPI increased at a 2.9% rate in April. Median CPI: Latest News Release

The Atlanta FED's sticky price index increased at a 2.2% annualized rate in April and 2.5% Y-O-Y. Sticky-Price CPI-Federal Reserve Bank of Atlanta

At meeting with automakers, Trump launches new attack on NAFTA | Reuters

The period for synchronized global growth looks like it has already ended based on PMI indexes. Global PMI slides to 16-month low in broad-based slowdown | IHS Markit About 74% of global composite purchasing manager indexes currently show decelerating growth. Barron's

As noted in my last post, Trump's tariffs on Canadian softwood lumber, which is used to build new homes, has caused a massive spike in lumber prices. The rise this year is approximately 30% and the price has hit an all time high. That spike is in effect a "tax" on U.S. consumers who have recently bought new homes. If the WTO rules that that the U.S. tariffs are illegal, lumber prices will fall back to earth. Tariffs are an indirect and hidden tax on consumers.   

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Markets and Market Commentary: 

U.S. government bond yields slip, while the yield curve tightens ahead of import, sentiment reports - MarketWatch

U.S. 2 Year Treasury Note (closed last Friday at 2.543%)

Going out to a ten year treasury picks up only an additional .427% in yield compared to the two year note. A 3 year treasury picks up .14% in yield and a 30 year treasury bond adds .56% for an additional 28 year term. 

2018 Daily Treasury Yield Curve Rates

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity Chart (the spread is narrowing and may turn negative later this year as the FED raises the FF rate which has a far greater impact on the 2 year treasury yield than the 10 year)

These factors are making small-cap stocks one of the strongest segments of Wall Street - MarketWatch

Post office blames U.S. government — not Amazon — for billion-dollar loss - MarketWatch

Apple made more profit in three months than Amazon during its lifetime

California says pot revenue is coming in 'slower than expected'

Get ready for $100 a barrel oil and the conflict it represents: CNBC

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Portfolio Management:

I am adopting a modified 4% rule. The normal rule is a retiree can withdraw up to 4% of their retirement savings per year. Why the 4% Withdrawal Rule Is Wrong: Kiplinger; 3 things you need to know about the 4% rule: CNN Money

My 4% rule will be the minimum amount of income generated per year based on my total portfolio's value. The rise in interest rates will make achieving that goal easier within the next 12 to 18 months. I am being held down by a heavy weighting in low yielding, short term bonds and CDs.

I am calculating now, based on reasonable assumptions about future expenses, that I will not have to use any of my principal to pay expenses at that level of income generation.

About 75% of that income can be reinvested based on my current health condition into more income generating investments which will grow the principal amount and increase the income generation.  One assumption is that I will not need either caregiver or nursing home services for the next 10 years.

I am investing with that goal in mind. The primary change in my investment approach will be to focus more on current income generation rather than current total return.

I am using the phrase "current total return" to highlight the difference between a bond's current total return and its ultimate total return when held to maturity.

Almost all of the intermediate term bonds bought this year have gone down in value as interest rates move up.

The current total return for many of those bonds is negative.

As the bonds mature, the "ultimate total return" will be the yield to maturity.

The emphasis will be on individual bonds which promise to pay a sum certain, either at maturity or on an optional redemption date. A bond fund does make that promise.

Several recent bond purchases have current yields and YTMs in excess of 4%. The current total return will be less than the current yield for as long as interest rates rise. Over time, I will earn the current yield and the YTM provided the issuers pay off at maturity.

I am dealing with credit risk by buying an extremely diverse number of high quality bonds, including investment grade corporate bonds, U.S. treasuries and Tennessee municipal bonds.

I am attempting to address interest rate risk through a ladder strategy where I have anywhere from $30K to $60K in maturities each month, with multiple maturities scattered throughout each month. 

I will continue to supplement my interest and dividend income with trading profits. I am changing the annual goal to a minimum of $20K. Last year, the sum was close to $50K. Most of those trades will be short term for relatively minor amounts.

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George Will, Donald and the Frequently Embarrassing Mike Pence: 

The conservative columnist George Will has replaced Trump with Mike Pence as the worst person in the U.S. government. Trump is no longer the worst person in government. Pence is. - The Washington Post ("Trump is what he is, a floundering, inarticulate jumble of gnawing insecurities and not-at-all compensating vanities, which is pathetic. Pence is what he has chosen to be, which is horrifying.") 

Will may be right on elevating Pence over Trump, but Pence is basically harmless for as long as he remains Vice-President. 

What set off Will was Pence praising Joe Arpaio, the former Sheriff of Maricopa County, as "a tireless champion...of the rule of law". Pence added for good measure that he was "honored" to be in Arpaio's presence. 

Arpaio is running for the senate seat being vacated by Jeff Flake (R-AZ).  George Will is not a fan of Arpaio, calling him "a grandstanding, camera-chasing bully and darling of the thuggish right, is also a criminal, convicted of contempt of court for ignoring a federal judge’s order to desist from certain illegal law enforcement practices."

Normally, I would say that disobeying a lawful judicial order indicates a lack of respect for the rule of law. However, republicans are redefining what truth means. So flagrantly disobeying the law now means championing the rule of law. Joe Arpaio, former sheriff in Arizona, is found guilty of criminal contempt; Mike Pence just gave Joe Arpaio a boost in Arizona- and it could lead to disaster for Senate Republicans - CNN 

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Iran preps 'industrial-scale' nuke production after U.S. leaves nuclear deal

White House official mocked 'dying' McCain at internal meeting | TheHill

Trump routinely mocked McCain. Trump comments on McCain war record spark outrage

Trump blew up at homeland security chief over border security - CNN 

Giuliani suggests Trump intervened to nix AT&T-Time Warner merger

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1. Small Ball: 

A. Bought 15 PNNT at $6.69-Used Commission Free Trade: 

Quote: PennantPark Investment Corp. (PNNT)

Closing Price Last Friday: PNNT $7.02 +$0.09 +1.30% 

Last Substantive Discussion:  Item # 1.B. (3/5/18 Post)

Chart: Bear Market Trend starting in August 2014, but showing stability in price over the past 2 years

Current Position: 100+ Shares  

Dividend: Quarterly at .$18 per share ($.72 annually)

Average Cost Per Share: $6.96

Dividend Yield at Total Cost = 10.37%

While this will sound like a simpleton comment, PNNT has a higher yield than any investment grade bond that I have discussed buying, but a common stock does not agree to pay me a fixed sum on a date certain. That promise to pay me X dollars on X date, made by a company that is highly likely to fulfill that commitment, is more important to me than a higher yield. I will continue to trade BDCs for whatever profit is available after collecting one or more dividends.  

Last Ex Dividend Date: 3/16/18 

Highest Cost Lot: 50 shares at $7.15

Maximum Position: 150 Shares (will sell highest cost lot using a commission free trade at >$7.30.   

Last Earnings Report: 

PennantPark Investment Corporation Announces Financial Results for the Quarter Ended March 31, 2018 

"As of March 31, 2018, our portfolio totaled $947.9 million and consisted of $382.4 million of first lien secured debt, $368.6 million of second lien secured debt, $32.3 million of subordinated debt and $164.6 million of preferred and common equity. Our debt portfolio consisted of 87% variable-rate investments (including 8% where London Interbank Offered Rate, or LIBOR, was below the floor) and 13% fixed-rate investments. As of March 31, 2018, we had no companies on non-accrual. Overall, the portfolio had net unrealized depreciation of $92.7 million as of March 31, 2018."

1st quarter NII at $.19 per share
Quarterly Dividend at $.18
Book Value Per share= $9

B. Bought 10 COTY at $15.66 and 10 at $14.32-Used Commission Free Trade:

Quote: Coty Inc. Cl A (COTY)

Closing Price Last Friday: COTY $14.300 -$0.200 -1.38% 

Coty is controlled by JAB Cosmetics B.V. which is part of the privately owned JAB Holding Company. The holding company is 100% owned by JAB Investments. The company also owns controlling stakes in Panera Bread, Krispy Kreme, Keurig Green Mountain, Peet's Coffee, Caribou Coffee, Einstein Brothers Bagels, and other brands. JAB owns about 8% of Reckitt Benckiser PLC.

JAB Holding is a European based company that traces its origins back to 1823. JAB Holding Company-Wikipedia; Germany’s intensely private and immensely wealthy Reimann family JAB stands for Johann Adam Benckiser who bought a small chemical business in 1823. Ludwig Reimann married one of JAB's daughters and ended up owning the business after Johann's death. The current owners are the great-great grandsons of Ludwig Reimann. 

JAB Holding Company-Led Investor Group Completes Acquisition of Keurig Green Mountain, Inc. 

JAB Holdings to buy bagel seller Einstein Bros.' parent for $374 million

Krispy Kreme to be Acquired by JAB Beech for $21 Per Share in Cash 

JAB Recent COTY Purchases: 

Annual Report for the F/Y ending on 6/30/17

Last Substantive Discussion: Item # 2.B. (5/3/18 Post)

Position: 30 Shares 

Average Cost Per Share: $15.48

Purchase Restriction: Small Ball Rule

Maximum Position: 100 Shares 

Dividend: Quarterly at $.125 per share ($.5 annually)

Coty Inc. Declares Quarterly Dividend 

I would view it as prudent to eliminate the dividend for at least five years and to use those funds to deleverage. Long term debt is over $7 Billion. Until that debt is significantly reduced, I would not view it as prudent for this company to acquire any other company that requires the issuance or assumption of meaningful debt. 

The foregoing would not be necessary IMO when and if operations are turned around to generate substantial free cash flow that could be used to pay down debt. 

Dividend Yield: 3.23% 

Last Earnings Report: The stock has seen motivated sellers in response to this report. 

Coty Inc. Reports Third Quarter Fiscal 2018 Results

"Gross margin of 63.4% increased significantly from 59.8% in the prior year, while adjusted gross margin increased 100bps to 64.3% from 63.3% with strength in all three divisions and mainly due to the realization of benefits." 

"In Consumer Beauty, net revenues declined minus 4.4% on an organic basis with the backdrop of a challenged mass beauty market and competitive pressure, but with several pockets of strong results including encouraging performance improvement from key brands relaunches. As I've said before, it will still take time for the full recovery of the Consumer Beauty division, although we're seeing signs of stabilization improvement."

Coty (COTY) Q3 2018 Results - Earnings Call Transcript | Seeking Alpha

In response to this report, Wells Fargo reduced its target price to $15 from $19. Morgan Stanley reduced its target price to $18 from $20. I personally view those price reductions to be premature, but they did create a bevy of motivated sellers who actually rely on analyst recommendations. 

Coty tops earnings expectations, as luxury's revenue offset a slight consumer beauty miss - MarketWatch


C. Bought 30 GMREPRA at $24.35-Used Commission free Trade: 

Quote: Global Medical REIT Inc. 7.5% Cumulative Preferred Series A Stock  (GMREPRA)

Closing Price Last Friday: GMRE-PA $24.77 -$0.03 -0.12% 

Volume is usually extremely light with a wide bid/ask spread. 

Gateway Post: Equity REIT Common and Preferred Stock Basket Strategy

Position in Capital Structure: Equity Preferred Stock superior only to common stock in the capital structure.

Maximum GMREPRA Position: 50 Shares (viewed as credit risky)

Purchase Restriction: Small Ball Rule (each subsequent purchase has to be at the lowest price paid in the chain)

Common Stock Position: 142+ shares (bought as a trade and a potential dividend harvest opportunity); Item # 1.A. Bought 10 GMRE at $7.19 and 10 at $6.77-Used Commission Free Trades (3/8/18 Post) I view this stock as a high risk REIT given its debt levels; its use of expensive equity capital to fund purchases; the external management structure and its cost; and GMRE's excessive free cash payout ratio. See: 10-Q for the Q/E 3/31/18 

GMREPRA Coupon and Par Value: 7.5% coupon paid on a $25 par value

GMREPRA Yield at a TC of $24.35: 7.7%

Dividends: Quarterly, cumulative and non-qualified (pass through entity)

Stopper Clause: Yes. The company can not pay a cash common stock dividend and defer payment of the preferred stock dividend. This clause is the means by which the preferred shareholders superior claim to cash is enforced against the common shareholders.

Last Ex Dividend Date: 4/12/18

Last Earnings Report: Q/E 3/31/18

FFO:    $.18 per share
AFFO: $.16 per share
Common Share Dividend: $.20 per share

Global Medical REIT Inc. Announces First Quarter 2018 Financial Results

The common stock dividend still exceeds cash flow which is a negative for the preferred stock shareholder. This small and relatively new REIT has been acquiring properties since it IPO, using IPO proceeds, common and preferred stock offerings and debt to finance the purchases. At least the company is moving toward being able to cover the common stock dividend with cash flow.

2. REGIONAL BANK BASKET STRATEGY:

A. Bought 50 FNB at $12.87-Used Commission Free Trade:

Quote F.N.B. Corp. (U.S.: NYSE)

Closing Price Last Friday: FNB $13.39 +$0.01 +0.07% 

FNB Analyst Estimates (as of date of purchase)
2018: $1.12 per share
2019: $1.24 per share
P/E Based on $1.24 and $12.87= 10.38

Trading Profits to Date: +$1,092.15

Last Sell and Buy Discussions: 

Item 2.A. Sold 60 FNB at $14.59  (3/5/2018)Item # 1.C Added 10 FNB-Used Commission Free Trade (11/30/17 Post) and Item # 4.B. Bought Back 50 FNB at $13.59-Used Commission Free Trade (10/23/17 Post)

Item # 4.A. Sold 100 FNB at $13.94-Satellite Taxable Account (10/23/17 Post)-Item # 1.A. Bought 100 FNB at $12.43 (9/14/17 Post)

Lowest Purchase Price: 

Item # 5 Added 50 FNB at $7.8 (7/20/2010 Post)-Item 2.B. Sold 57+ FNB at $14.2 (7/3/17 POST)

Current Position: 50 Shares

Purchase Limit: 100 Shares  (restrained by negative dividend history)

Next Purchase: 50 share at below $12.2

Next Sell Target: > than $14

Dividend: Quarterly at $.12 per Share  ($.48 annually)

FNB | FNB Corp | Dividend History | Dividend Channel

Dividend Yield at a TC of $12.87 per share= 3.73%

Dividend History: Major Negative. 

The Board reduced the quarterly dividend from $.24 to $.12 effective for the 2009 first quarter and has not yet raised it since that 50% slash. The Board and management are too busy building their banking empire. 

I would add that FNB's investor relations website is pathetic. Investor Relations | First National Bank

Management-Empire Building Mode: 

I see no material benefit yet to shareholders in terms of E.P.S. and dividend growth resulting from FNB's empire building which is normally the case for companies in that mode. Banks are acquired at a premium with the acquisition funded entirely or mostly with new shares.  

E.G. F.N.B. Corporation to Acquire Yadkin Financial Corporation, Creating Premier Mid-Atlantic and Southeast Regional Bank (all stock)

Mergers & Acquisitions | First National Bank

I draw the overall lack of material benefits opinion from this historical data:

Footnotes:

Page 40 2017 Annual Report

When I look at that kind of five year data from a bank, my conclusion is that the Board and the top layer of management need to fired.

FNB's stock is deservedly in a funk. The stock was at about the same price as in July 2013: Chart A purchase at the closing price on 7/22/13 through 5/3/18 would have produced a total average annual return of 3.42% which is of course pathetic. DRIP Returns Calculator | Dividend Channel The dumb regional bank ETF KRE had a 13.27% average annual total return during that same period.

There are two ways to look at it and both are correct.

One way is to rightfully conclude that management and the Board have failed shareholders.

The second way is that their failures are already priced into the stock and then some IMO.

The current consensus E.P.S. is for $1.12 this year and $1.24 next year. FNB Analyst Estimates The P/E is 10.38 using the 2019 estimate and a $12.87 total cost per share. The dividend yield is 3.73% based on that price and the current quarterly rate.

The hope for shareholders is that the Board will wise up for a change and prevent any further acquisitions, requiring management to grow what they now have and to increase returns from the existing geographic footprint.

Last Earnings Report: F.N.B. Corporation Reports First Quarter 2018 Earnings

Given the frequent number of acquisitions, earnings report are noisy with too much clutter. Integration and merger expenses are close to normal items. The 2017 4th quarter was negatively impacted by a non-cash charge due to a revaluation of the net deferred tax asset resulting from the lower corporate tax rate. The 2017 first quarter had $35.1M in merger related expenses related to FNB's acquisition of Yadkin Financial which closed in that quarter. 

NIM is temporarily juiced by acquired loan accretion accounting:

"The net interest margin (FTE) (non-GAAP) expanded 4 basis points to 3.39% and included $1.8 million of higher incremental purchase accounting accretion and $0.7 million of higher cash recoveries, compared to the first quarter of 2017."

Moving the clutter aside, there are some positives. 

Efficiency Ratio (non-GAAP):  55.8% down from 57.2%
Charge-Off Ratio: .2% annualized 
Loan to Deposit Ratio: 94.5% (no need to acquire brokered deposits)
NPL Ratio at .48%
NPA Ratio at .45%
ROA at 1.12% (slightly above average)
Return on Tangible Equity: 17.48%
E.P.S. $.26 in line with the consensus estimate

The return on average equity is below average at 7.94%.  
  

3. Intermediate Term Bond/CD Ladder Basket Strategy:

A.  Bought 1 Union Pacific 2.95% SU Bond Maturing on 1/15/23:

FINRA Page: Bond Detail (prospectus linked)

Issuer: Union Pacific Corp. (UNP)
UNP Analyst Estimates

Union Pacific Reports Fourth Quarter and Full Year 2017 Results
Union Pacific Corporation Announces a 10 Percent Dividend Increase for First Quarter 2018

UNP SEC Filings

UNP 2017 Annual Report (debt discussed starting at page 72)

Credit Ratings:

Bought at a Total Cost of 98.368
YTM at Total Cost Then at 3.326%
Current Yield at TC = 3%

B. Bought 1 Ventas 4.125% SU Bond Maturing on 1/15/26:

Finra Page: Bond Detail (prospectus linked) 

Issuer: Operating Entity for Ventas Inc. (VTR) 

Ventas Announces Pricing of Senior Notes Offering (2/13/18)("$650 million aggregate principal amount of 4.00% Senior Notes due March 1, 2028 (the “Notes”) at 99.233% of the principal amount.") 

Ventas Reports 2017 Fourth Quarter and Full Year Results 

VENTAS SEC Filings

VTR 2017 Annual Report 

Credit Ratings: 

Bought at a Total Cost of 99.15
YTM at Total Cost Then at 4.255%
Current Yield at 4.1604%

C. Bought 1 Boston Properties LP 3.8% SU Bond Maturing on 2/1/24:

FINRA Page: Bond Detail (prospectus linked)

Issuer: Operating Entity for Boston Properties Inc. (BXP) who guarantees the note

BXP SEC Filings

BXP 2017 Annual Report

Credit Ratings:

Bought at a Total Cost of 99.54
YTM AT TC Then at 3.889%
Current Yield at TC = 3.8176%

4. Short Term Bond/CD Ladder Basket Strategy:  

A. Bought 1 Treasury 1.625% Coupon Maturing on 4/30/19:
YTM = 2.234%

This is my first buy of this bond. 

B. Bought 2 Umpqua Bank 1.9% CDs Maturing on 10/29/18: 

Holding Company: Umpqua Holdings Corp. (UMPQ) 

UMPQ Analyst Estimates 

Umpqua Reports First Quarter 2018 Results 

I have bought and sold UMPQ in my regional bank basket strategy. 

My most recent elimination was discussed here: Item # 2.A. Sold 50+ UMPQ at $19.09: (2/19/17 Post)(UMPQ Trading Profits = $534.88).  

C. Bought 1 Union Pacific 2.2% SU Bond Maturing on 6/19/20: 

Issuer and Credit Ratings: See 2.A above

FINRA PAGE: Bond  Detail (prospectus linked)

Bought at a Total Cost of 98.94
YTM at TC Then at 2.764%
Current Yield at TC =  2.2236%

Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.