by Travis Johnson, Stock Gumshoe | January 27, 2023 12:45 pm
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FYI, a little birdie alerted me that Porter Stansberry recommended this same preferred last week — part of the argument is in his free article here, if you’d like another perspective: https://website.porterandcompanyresearch.com/untitled-6/
Travis, with QRTEP quarterly dividend, like most dividends, do you re-invest it in the fund, QRTEP?, or do you take it as cash? I used to own IIPR Preferreds on your reco, and cannot remember what your practice was.
Side note, we have a daughter that works for Qurate in their Pennsylvania area offices.
PS – I tried adding to Topic in below QRTEP and Qurate, but nothing populated the field.
Preferred dividends I’m so far choosing to take in cash and reinvest elsewhere… mostly just as a risk-reduction “in case I’m wrong” move.
Makes sense, thanks much. Have a nice week-end.
Travis, is QRTEP set up for DRIP?
Regards,
Frank
I’m not reinvesting the dividends for my preferred shares.
Most brokers don’t automatically reinvest preferred dividends, I don’t think, perhaps some do. I haven’t checked to see whether it’s an option in my account.
Intuitive surgical is a great company. But the big gains are probably over. I have been following a penny stock with
roots in Germany and Japan mainly in large city hospitals with rapidly expanding sales. It holds a reasonable
amount of cash and no debt. What caught my attention was that they recently applied to the FDA for Pediatric approval in the USA. That is when I purchased some shares.—Asensus Surgical—ASXC. But you decide. Good website.
That’s the owner of the Senhance system I note above (used to be called Transenterix).
True, ISRG can’t go from 0 to $100 billion again. Smaller competitors could grow much faster… I just think their first-mover advantage is much more valuable.
I almost pulled the trigger twice last year on ISRG, but hesitated because of the P/E ratio. Like you, I want the price to drop a bit more. I’d like to see it below 220, maybe even 210.
And your remark about robots: “… for most people in most professions, the struggle will not necessarily be that you’re going to be replaced by a robot in the next 30-50 years, it’s going to be that working with a robot will be among your most valuable skills.” Well said, and I couldn’t agree more.
It may well get there — for me, the most likely super-negative catalyst will be the launch of Medtronic’s Hugo in the US. I think it’s possible they’ll get FDA approval for their first indication at some point this year, given the data collected (and approvals) in Europe and their first clinical trial that launched in the US in December. Rollout will probably be fairly slow and limited, they’re still tweaking the system for surgeons and still developing new tools for it, so they won’t immediately have thousands of the robots available for sale… but if they price it cheap enough, they’ll certainly have orders and will get a lot of attention. That could shake up the stock price more meaningfully, we’ll see… though it’s also possible, of course, that a bunch of surgeons will start to complain about how terrible Hugo is once more folks have been trained to use it, you never get to know the future.
Travis, if you recall I asked for a dividend stock with potential for capital appreciation in your last premium post and proposed BGS, but wasnt sure. A couple of days later you deliver. I am going to watch QRTEA. Thanks
Hope it works out for you!
I never sold my tower stocks. Only the weak hands bailed. (jk!)
The dramatic drop in inflation seems too fast for it to be an interest rate phenomenon. The December PCE is annualized. One swallow doesn’t make a Spring. Other forces are at work here. Also egg prices didn’t get the memo. I lived through the inflation in the last century and it didn’t fall over like a dead tree. There was some real pain. It dragged on for over a decade and there were two recessions. I doubt a few piddly rate cuts are going to counter the largest money printing in history, wars all over the place, energy prices still elevated, etc.
I think the decrease may indicate we’re going into a deflationary period with a recession. There will be pressure to pause QT. Pausing is not the same as decreasing but decreasing could happen. In Weimar Germany over 300 politicians were assassinated and there were several rebellions. They didn’t dare raise taxes to cover deficits so they printed. I don’t see a great deal of courage in the US leadership. They were scared to death on January 6. And Brandon just handed us a shiny new spending program. I’m already getting solar panel calls and the funds probably won’t be available until late this year.
Recession isn’t necessarily curative. There were TWO recessions before inflation was tamed in the late 80s.
There’s also a buyers’ strike in housing. KB Homes reported in Q4 they had a 68% cancelation rate and DR Horton reported a 40% rate. DR Horton has decided to convert some of their new inventory into SFH rentals. Quite a few new houses have already been built and if you look at permits it looks like there are a lot in the pipeline. Housing glut? My daughter and her husband live in Austin in a high-end apartment building. They recently moved to a better apartment in the same building without a rent increase. The owner subsequently regretted it but I think it was a smart move to lock in a tenant now than to wait for rents to crater.
Too soon for an inflation victory lap unless you consider recession and/or deflation a victory. I freely admit to being a follower of the Austrian School and I believe that what Mises said about exiting a crackup boom was correct. There is no painless way out. And boy oh boy have had ringside seats at a crackup boom.
So probably the Fed will pivot like a basketball player who stopped dribbling because all they can do is pivot between reacting to inflation and recession. Where will the value of money be when people realize no one’s in control?
Good points, thanks. The slow reaction time of both interest rates and inflation is frustrating and unpredictable, and Wall Street likes to draw straight lines even though the real world moves in fits and starts.
Housing has a dramatic impact on inflation numbers, but with a VERY long lag. The drop in inflation we’re seeing now is to some degree coming from the drop in home prices and rents that started (in many places, certainly not everywhere) last spring, when mortgage rates spiked.
If economies turned on a dime Bush The Elder would have had a second term. Instead the effects of whatever turned things around manifested about 6 months into Clinton’s term and he took the credit.
I was living in an economically depressed area where one of the main employers was Cummins. People started talking about how Cummins was hiring again. They were “green shoots” if anyone was paying attention. Too late for Bush 1.
Personally I don’t think Presidents have very much power over our economy.
Dear Travis, As always you wrote another good piece all around.
I have a question about QRTEP (and all preferred shares with the same arrangement). If an investor decides to buy $1000 of QTREP at $50 a share (and to simplify the scenario takes the dividends out as cash instead of putting the dividends back to buy more QRTEP), and holds the preferred shares until maturity in 2031 (which month?), and QRTEP, still solvent, is obligated to redeem the preferred shares at $100 on that date (for the investor $2000 shows in the brokerage account), what is the protocol at that time? Do the preferred shares get bought automatically by Qurate at $100 a share without further action from the investor, or does the investor have to go into his or her account and actively initiate the sale? Furthermore, let’s say that the day before maturity (whatever that date is), QRTEP is $80 a share. What happens to the price as shown on the next day, the date of maturity? Does it suddenly jump to show that each share is $100?
One last question: Can a company, after it makes available preferred shares to be bought, make changes to the preferred shares arrangement? For example, can Quarate one year from now change the its obligated redemption price of $100 to $90, or change the date of maturity? I imagine that there may be serious legal ramifications.
Thank you.
It’s not really a buyback by the company at the end,
It’s more like a bond maturity — the shares disappear, you get $100 in cash. You might have to call your broker if you want specifics, they probably all handle it a little differently, but it’s fairly simple. You should not have to take any action to receive the cash.
Absent a bankruptcy reorganization or other court action, I don’t think there’s any way to change the terms of the prospectus. never Say never, but they can’t just change the terms if they feel like it (like they can with common stock dividends). They can redeem the shares early if they want to, still at $100, but I think the first redemption date is only six months before maturity.
Travis, will be grateful for any comments on why QRTEP is dropping so much. I have 40% drop in my investment value fom Jan in what seemed to be a straightforward locked in arbitrage opportunity. Am I missing anything? Thanks always for your wit and wisdom, Cheers. Brij
It’s just rising fear that the company will go bankrupt, I believe. Same thing that happened late last year, though nerves are a bit more frayed now. Because the preferreds are longer term than some of the senior debt, there’s worry that although they should be in decent shape for a couple years and are currently able to pay their interest and their preferred dividends, there are enough debt maturities before the preferred matures that the preferreds could miss out if there’s a bankruptcy in the 2025-2026 timeframe.
The share price of the common (QRTEA) is really the first indicator of “how worried are people about bankruptcy” — and that’s been falling in recent months. I expect there to be at least a couple years of preferred coupon payments before bankruptcy becomes a more likely outcome, which would de-risk the position to some degree (since we’re getting $8/year in cash), but it’s a heavily discounted preferred for a reason and it’s certainly possible that the company could fall apart. The weak fourth quarter means that more is riding on their turnaround efforts, which are by definition uncertain.
I commented on the weak quarter and increased risk after their annual report a few weeks ago, in case you missed that — here’s part of what I said:
I’ll let you know if I change my mind.
The publicly traded “baby bonds” (QVCC and QVCD) have lost about half of their value in the past couple months and also currently trade at extreme yields (about 20%), though the maturity is so far off (2060s) that the dynamic is a little different. Not sure exactly where they are in the capital structure, but they’re at least above the preferreds and the common equity.
The nearest maturities of QVC bonds tell the story of where investors see the fear kicking in — the QVC April 2024 bonds, maturing in about a year, last traded at about $78, giving more than a 30% yield. QVC Feb. 2025 bonds are down to $55, with an effective annual yield to maturity over 40%. There are no maturities to worry about in the next year, really, so those prices tell us that traders are worried about getting paid back in 2024, and more worried about 2025. It’s a strange capital structure, with lots of overlapping and competing creditors and subsidiary companies, but that tells you how credit investors are feeling. And that got much worse after the quarterly update a few weeks ago, those bonds were trading far closer to par in February, so that’s a pretty clear vote of “no confidence” in the turnaround plan so far… or, perhaps, just a shift in how investors fell about risk right now.
Do you have a view on the DBRG equity here, besides the preferreds? Thanks.
I’ve built up a position over the past year or so, still in the red. I like the company, but private equity isn’t particularly thrilling investors at the moment.
I’m usually leery of Stansberry picks, but from my research, the company looks healthy enough to take the risk on the Qurate preferred, at least for the near term. BofA estimates a continued loss of customers and revenue thru fiscal ’24, so need to watch that closely. I’ll by the dip, and thanks for the tip!
Thanks, Travis. Your insightful blatherations are much appreciated!
Trade Note: Arbitrage in a decidedly LOW yield investment
Today we finally saw the difference between UHAL and UHAL/B shares bulge out to about 10%, and that was enough for me to sell my voting shares (UHAL) and use that money to buy a larger stake in the non-voting shares (UHALB), which is exactly the opposite of the arbitrage trade I made back in November, when UHALB was first created and traded at a big premium to UHAL shares for no good reason. I also boosted the overall position a little bit in the process, but not by a ton. In effect, I boosted my exposure to U-Haul by 23% at a net cost in the $30s for those new B shares, and reduced my average cost per share overall for the position, so my average cost is now down below $45. Like I did with my last U-Haul arbitrage, I’m entering this in the Real Money Portfolio as the net of my trade today, partly for simplicity and partly because I am indifferent to whether I own UHALB or UHAL. This trade is in a tax-deferred account, so I don’t have to worry about the tax implications.
What did I give up? A vote. That is absolutely OK with me, particularly because my vote was and always will be meaningless — as will everyone’s who isn’t in the Shoen family, which has always controlled the shares, even before the non-voting shares were created. If outside votes are all but irrelevant, then a vote is not worth paying for. It’s OK for the voting shares to carry a small premium, since there’s always the outside chance that some outsider would try to buy them up to exert some influence… but 10% is too high, in my judgement, particularly for a company like this where the insider control is firmly entrenched. And it’s control by the founding family, no less, though the family has been an infighting disaster at times in the past — maybe they’ll even end up fighting each other over voting shares someday, so I guess that’s another possible reason for paying a premium for the voting shares. Still, 10% is too much for me.
What did I gain? Well, I lowered the cost of my holdings and maintained my economic ownership of the business… but other than that, nothing, really — perhaps a slight dividend advantage (the UHALB shares have a dividend, UHAL does not have a dividend policy — but UHALB has promised only 16 cents per year, so it’s literally a rounding error, the yield is about one quarter of one percent). The voting shares have historically paid special dividends from time to time, without a firm promise of an ongoing dividend, and that might continue — but if it does. the UHALB shares are required to receive a dividend that matches UHAL’s. My reading of the prospectus and the split/dividend announcements back in November tell me that’s the only functional difference between the shares — UHAL gets a vote, UHALB gets a tiny dividend promise, otherwise they are equal ownership shares of the same company (your reading may differ, of course, and please do let me know if you see other differences).
When in doubt… don’t pay for something you don’t need and can’t really use, especially if you’re pretty sure nobody else will ever really need it, either. I’m happy to increase my exposure to U-Haul and lower my cost per share, and if it swings the other way again someday, and the voting shares become less expensive than the non-voting shares, like they were back in November, well, I’m happy to do this arbitrage trade for a third time and switch back. I want the cheaper shares, and it doesn’t really matter to me which ones those are. Strangely, there are about 9X as many B shares as there are voting shares, so the B shares should be more liquid… but the trading volume for both has been very similar so far.
The next catalyst for things getting a bit shaken up with U-Haul is probably their next quarterly conference call. Maybe investors will notice that only one share class is getting a dividend and will bid up my B shares again, or maybe there will be some strife that makes the voting shares more popular instead, we’ll see. More likely, both will move on whatever the earnings and outlook might be — the earnings will come out next Wednesday after the close, and the conference call will be Thursday morning. There is no real analyst coverage of UHAL, it’s too closely held and illiquid so it’s mostly value-oriented mutual funds and hedge funds who own shares and participate in the conference calls, not sell-side analysts… but as of today, I think the general expectation is that 2023 will be very similar to 2022, perhaps a little worse, with earnings per share in the same $5.50-6 range.
Not as cheap as it was when we started buying last year, but at 10-12X earnings that’s still a big discount to the market for a dominant brand… and since investors are worried about a decline in demand for moving trucks in the near term, you get exposure to one of the best and fastest-growing self-storage companies, too, at an implied valuation that is dramatically lower than the self-storage REITs. I’ll update my “buy below” numbers once we’ve gotten their earnings report, the analysis I did way back in June is looking a little too conservative now, so it’s technically above the “max buy” price I set back then… but unless the report is shocking, the B shares look pretty reasonable today in the low $60s. This one has been slowly crawling up the portfolio, it’s now in my top 15 holdings.
Trade Note: I sold all of my UHAL shares at $66.98, and bought 23% more shares of UHALB at $60.91. Net change is a purchase of 23% more economic interest in U-Haul at a cost of $34.16 for each of the “new” shares.