Teeka Tiwari has a new teaser ad out about his “2023 Recession-Proof Portfolio,” pitching his Palm Beach Infinity service… which is essentially a “lifetime basket” subscription, you pony up a huge up-front payment ($5,000 in this case) and a “maintenance” payment ($199/yr), and you get access to Tiwari’s Palm Beach Confidential and Palm Beach Crypto Income, both of which seem to be focused on cryptocurrency speculations, as well as Palm Beach Alpha Edge, his non-crypto trading service, and some unidentified new publication he’s going to launch next year. This is where almost all the profit for big newsletter publishers comes from, upgrading readers to the “big package” or the “lifetime deal.”

That’s probably a harder sell than it was when they planned this promo, since investors have lost a lot of interest in cryptocurrency in the wake of the FTX bankruptcy and the loss of massive amounts of customer account money in what was supposed to be one of the more reputable cryptocurrency exchanges… but though most of these newsletters are crypto-focused, Teeka isn’t really pushing the crypto idea hard here, beyond saying that making small bets on cryptocurrencies can be an “asymmetric” way to make big gains if you accept that they’re extremely volatile and risky… he’s mostly talking up his “VIP Shares” as a safe way to avoid the coming storm, and the “Special Report” he’ll share with Infinity buyers about these “VIP Shares”.

So what are those VIP shares? This was a weeklong promo, with little teasers dropped into our inboxes every day or two, so we can start with a little bit of the hinting…

“It’s not ‘regular stocks,’ crypto, options or private deals.”

And the fact that he added the adjective “regular” is probably very meaningful.

“Warren Buffett has “already invested $8 billion into this”

And…

“I found a total of 17 Wall Street funds that are putting not 50%, not 70%, but 100% of their money into these assets”

“$30 billion in total.

“I believe they’re doing that to prepare for this coming crisis.”

OK, so what’s the “Lehman Event” or “Lehman 2.0?” Tiwari says the catalyst is scheduled for early December, and it could cause the house of cards to collapse… and that the event is “guaranteed to occur.”

Tiwari’s “next Lehman” isn’t a stock, or even a sector, really, it’s “emerging markets” — and that “early December” event that will bring down the house of cards is just “the Fed’s gonna raise rates again” …. here’s some of the basic premise from one of his emails:

“The Federal Reserve’s series of rate hikes this year will continue to support the U.S. dollar and eventually bring inflation under control….

“If the Fed keeps raising rates like it’s promised… I believe it could trigger a debt crisis in emerging markets (EMs).

“If you’re unfamiliar with emerging markets, the term refers to developing nations undergoing fast economic growth…..

“… since EM currencies are less trusted than more developed countries, they are often forced to borrow in U.S. dollars…

“This opens them up to massive currency risk if the U.S. dollar moves significantly higher in value against their local currency….

“So every time the Fed increases interest rates, the U.S. dollar strengthens relative to those other currencies… and it becomes more expensive for these countries to pay their debt….

“When global interest rates rise, EM nations typically need to aggressively raise their own rates to make their debt more attractive and to avoid a collapse in demand… This craters the value of their already issued debt.

“A stronger dollar also makes it harder for EM countries to service their debt… raises their risk of default… and causes investors to lose confidence in holding that debt.

“It’s a vicious cycle that can quickly spiral out of control… and it’s the kind of collapse I think we could see if the Fed keeps hiking rates.”

So really, what Tiwari is talking up as the risk is more like what happened in the late 1990s than like the Great Financial Crisis and the collapse of Lehman Brothers — that’s when we had the debt crisis in Russia and Asia that led to defaults and the implosion of Long-Term Capital Management, necessitating an intervention by the government to “save” the global debt markets (if you weren’t around at the time, Long-Term Capital Management was the hedge fund that famously thought that it had invented a better mousetrap in arbitraging debt and interest rates — it was run by brilliant traders and Nobel prize-winning economists, but it also believed too much in its computer models and kept holding Russian debt as it collapsed… and since so many people believed in the power of brilliant minds to make money without risk, LTCM had by then grown to own about 5% of the entire global bond market, so the Feds stepped in to loan them a shocking (at the time) $4 billion to help them liquidate the portfolio in an orderly fashion instead of crashing the global markets).

OK, so, maybe we’ve got a crisis in emerging market debt coming. That makes quite a bit of logical sense, the strength in the dollar has absolutely been terrible for a lot of other countries in the world. And the Fed probably will keep raising rates at its next meeting on December 13, though the speculation these days is that they’ll raise rates by a less-dramatic amount, and investors have been seeing “signals” of the Fed finally taking its foot off the gas a little and waiting to see how the economy is reacting to their higher rates. Sentiment changes about that every week, as different Fed speakers try to continue to “talk tough” and as we get new economic data that either reinforce or scuttle the idea that inflation rates have peaked, so the story could be quite different in four weeks when the Fed meets again… just in the last two days, the market has turned more pessimistic about that “Fed pivot” as the tough talk continues from Fed Governors. We’ll see.

So the risk is that rates go too high, emerging markets debt collapses again and roils the global markets, and a lot of investments will get clobbered if that happens. Whatever should we do?

Teeka talks up his “asymmetric” trade as one way to deal with this, and it sounds like that’s probably just “put a little bit into cryptos, because if they go up 10X then it will make up for a lot of ugliness” — a little leverage on the upside, without risking a huge amount of capital. He doesn’t talk as much about that.

What he really promotes is this idea of “VIP Shares” as a safer investment. Here’s one bit of the promo:

“I also reveal how it could give investors a shot at 14x returns using a little-known recession-proof asset I call ‘VIP Shares.’

“These VIP shares are far safer than regular stocks but still offer massive upside… And just for joining me… I revealed the name of one VIP share absolutely free.”

And better yet, he says these investments work pretty well even if there’s not a crisis…

“Even if I’m wrong, you could still walk away with 2X, 3X your money.”

The magic word seems to be “safe” these days, and he certainly plays off of that…

“Very safe, recession-proof strategy that I believe is perfect for this crazy market.”

And, of course, we’re told that Teeka is our way in the door, because this is stuff only the “elites” know about…

“A financial asset that most people don’t know about, because they’re reserved for the elite, wealthy people and institutions.”

Including Warren Buffett…

“Buffett recently invested $10 billion into this, and has made more than $2.4 billion in pure profits despite the market chaos. This has been Warren’s best investment in recent years.”

And he implies that they’re a little hard to find…

“They trade under a different ticker system than we’re used to.”

So what’s he talking about? What are those “VIP Shares?” Well, it’s pretty clear that he’s just talking about “Preferred Stock.”

And yes, Warren Buffett has bought up bunches of preferred stock in the past, both as rescue funding for some companies in 2008 and 2009, and more recently with Occidental Petroleum last year, when they needed capital for their acquisition of Anadarko.

Get those “Buffett preferreds” out of your head, though, those are specific deals that Warren Buffett got, on very friendly terms, because his signature is worth a premium price to companies who both need financing and will also benefit in a big way from the implied Buffett “stamp of approval.” He’s no dummy.

But yes, many issues of preferred stock are also available to anyone, publicly traded and listed on the major exchanges — though they’re not usually super-liquid, and they don’t trade much. For the most part they are seen as income investments, and they trade that way, with quite a bit of sensitivity to interest rates.

What is a “preferred stock?” It’s sort of a junior bond, with a little bit of equity-type exposure — depending on your perspective, it blurs the line between stocks and bonds and could be the best or worst of both worlds. Here’s how Morningstar put it a couple years ago:

“Preferred stocks are a type of hybrid security, with a blend of equitylike and bondlike characteristics. Like bonds, preferreds make regular income payments and have a fixed par value. Unlike bonds, though, preferred stocks aren’t guaranteed obligations and rank lower in the capital structure than traditional debt. In the event of a bankruptcy, bondholders take preference over preferred stockholders for receiving payment; preferred stock ranks below subordinated debt in the capital structure. Like stocks, preferreds generally don’t have a fixed maturity, although they often contain a call feature that allows the issuer to redeem them at par or a slight premium after five or 10 years. Unlike stocks, though, they don’t have a stake in residual profits; therefore, preferred shareholders don’t participate in the appreciation potential of other equity securities.”

Preferreds often trade on exchanges just like stocks do, but have slightly different tickers (like PW-PA, which would be the series A preferred shares of Power REIT (PW) — that’s just an example I was looking at the other day, not anything Teeka mentioned). They generally have very high dividends, and pay them quarterly just like most stocks do… though the dividends are fixed, like a bond coupon (so you don’t get “dividend growth” like you often can with stocks — you have no direct exposure to a company growing or improving, and preferred share dividends don’t have any real hope of keeping up with inflation).

But if a company is at some risk, and there’s a little fear of bankruptcy, the preferred shares will be at least a little bit safer than the common equity. If a company liquidates, the bondholders get made whole before the courts look to see if anything is left over for shareholders… but once the bondholders are satisfied, the preferred shareholders are first in line, in front of the common equity holders.

And if the business is not actually going bankrupt, but is just suffering through a recession and pulling back, the preferreds are likely to hold up better, with dividends that can often be postponed but not cut or canceled. Unlike common stock dividends, preferred stock dividends typically aren’t optional, and in many cases they are cumulative (which means that if the company really gets into trouble and has to halt their preferred dividends, they eventually have to catch up and repay all those missed dividends, and do so before they’re allowed to pay dividends to common shareholders in the future).

Preferred stocks are, in a word, boring. Most of the time. The appeal has generally been that the income yield is high — typically substantially higher than the same company’s corporate bonds would pay (since preferreds are not as guaranteed as bond coupons, and are usualy perpetual, with no set repayment date or repayment obligation from the company), and they’re also often dramatically higher than the common stock dividends (since you don’t get any dividend growth potential — though sometimes they’re also lower than common stock dividend yields for the same company, if it’s a riskier high-yield stock, since the preferreds are also likely to be safer).

Companies use preferreds for a lot of reasons, but a lot of the appeal for the issuer is that they get to raise money at a similar cost to issuing a bond, but it doesn’t count as debt on their balance sheet and they’re not legally obligated to repay the principal at a future date, so it provides some nice flexibility… and they also don’t have to dilute their earnings per share, since they’re not adding common stock, or their voting power, since preferred shares generally don’t get a vote. There’s a little magic in it, because companies do have to include their preferred shares in their financial filings… but preferred stock doesn’t show up as a “debt” liability on the balance sheet.

The majority of preferred stocks are issued by financial, insurance, real estate and utility companies — companies that use a variety of different kinds of debt and are usually pretty levered up in general, but that are also fairly stable and can offer investors some confidence when it comes to these not-quite-debt, not-quite-equity-participation securities. The general rule is that they’re pretty safe, they’re easily traded like stocks but act a little like bonds, they’re usually not nearly as volatile as stocks but also have very little “upside” compared to stocks, and they offer some stability, diversification and income in a portfolio.

The ceiling for preferreds, and one reason that they have limited “upside” (in addition to the fixed nature of the dividend), is that most of them have a ‘call’ feature — after a certain number of years, they become “callable” at par by the company… “par” is just what the original offering price was, and that’s almost always $25 a share. So even when interest rates were super low, and preferreds were paying very high yields compared to other investments, even the bluest of the blue chip preferreds often only got as high as the $27-28 range because of the risk that, with rates low, the company could easily raise more money at lower cost and redeem the preferreds at $25.

Beyond that, preferreds tend to react negatively to stock price shock — if a stock is collapsing and investors begin to think it’s in serious trouble, the preferreds will fall, too, they just usually won’t fall as much (especially if the preferred dividends are still being paid). If a stock soars, and the preferreds seem like extremely safe bets, then they don’t usually drift too far above that $25 level if there’s a “call” feature (as there usually is)… but whether or not they hold up around that $25 “par” level depends mostly on interest rates. If the company is safe and there’s no perceived risk that the preferreds will be called, then the shares will be traded at a level which provides a comparable income yield to other relatively low-risk investments that have no real growth potential.

The big opportunity comes when there’s distress in the system, as you might imagine. If you’re paying a little premium over the $25 par price, then all you’re ever likely to get is that fixed dividend — nice, but interest rate-sensitive, so if rates go much higher, well, maybe what you bought as a fixed 7% yield doesn’t look so awesome anymore. If, however, the preferreds have fallen to, say, $15, because everyone’s in a bit of a panic, then you are likely to earn a much higher yield, and you have at least the theoretical potential of appreciation when (if)things get better, and the preferred share drifts back to near its $25 par price (mostly because if the company is doing great in the future, and can raise capital on better terms, there’s a decent chance that they’ll effectively refinance those higher-cost preferreds by redeeming your preferred stock at $25.

The “callable” feature is only for the issuer, not for you, so you don’t get a guarantee on your $25 (like a bond holder is guaranteed to get their principal back)… but, as Teeka implies, during past crises when share prices have collapsed, including during the financial crisis when a lot of people sold their bank preferred stocks, they did eventually recover and gradually get “pulled back up” to near that $25 level in many cases. It wasn’t guaranteed, and it didn’t happen to all of them, but for a lot of those banks that were permanently injured by the 2008 crash and diluted their shares dramatically, the preferred stocks did do better than the common stock over the ensuing 5-10 years.

So… you get very low volatility, usually, and you get a much higher dividend than most stocks and most “blue chip” bonds… and sometimes, you get a better return, though your chance of a better return really depends on interest rates not rising, and on you being patient enough to buy at a distressed price.

The big pitch, then, is that Teeka thinks we should buy preferred shares at a discount to the $25 par price. Sometimes a big discount. And as long as the company survives and things normalize at some point, they will eventually get back to something like $25. Teeka’s phrase is that the $25 price “acts like a magnet” — and the most exciting examples he gives are of some of the banks who got shellacked in the financial crisis, like Popular (the Puerto Rico bank, their preferreds fell to about $7 when all the banks seemed to be at risk of bankruptcy in 2008, but by 2012 or so they were back at around $23… and they paid dividends for most of that time, dramatically outperforming that same bank’s common shares).

It’s not a guarantee, to be clear, you can’t choose to redeem your preferred shares for $25 whenever you want, that’s an option only for the company… but yes, preferred stocks have generally tended to trade in the mid-$20s, most of the time, so there is a general tendency to stick near that par price. With the caveat that this has been true for several decades, most of the time (not all of the time), and that we haven’t really tested this idea in a world of rising interest rates.

That’s key, because some of the appeal of a lot of the bank preferred stocks over the past decade has been that available yields on anything else that was reasonably safe were very, very low — remember, we haven’t had a period of dramatically rising interest rates, at least not a long period, in close to 40 years. Most preferred stocks have fallen pretty sharply this year, because of that interest rate sensitivity — so whether they recover depends not just on our perceptions about the health of the underlying company in the future, but about how appealing their fixed yield looks in comparison to the yields available on safe investments in the future.

Much of the argument is that buying these shares at very depressed prices in 2008 was hugely profitable — real estate companies, banks, etc. We’re not in that kind of crisis right now, the preferreds we see falling now are mostly falling just because interest rates are rising… but perhaps we’ll be in a crisis soon, and perhaps rising interest rates are providing that kind of “buy low” opportunity in some preferred stocks that the world thinks will suffer from inflation or higher interest rates.

We’re not likely to see a repeat of the bank preferred shares and their dramatically strong performance relative to the common stock, so those examples that Teeka gives from that time period are probably an exaggeration of the potential ahead, but the general theme is reasonable: If things get really ugly, whether because of the next Fed rate hike or a collapse of emerging markets or whatever else, then a lot of preferred stocks will hold up better than their company’s common stock… and if the Fed then “pivots” to ease up a little bit in a few months or a year or whenever, and interest rates drift back down, that will probably give the preferred shares that you buy at a discount this year the opportunity to recover and move a bit higher, providing some capital gains. You can’t daydream about capital gains if you buy the preferreds at $23 or $25, because of that call feature most preferreds have… but you might have the opportunity if you buy a preferred at, say, $10 or $15 or $18. Similar to a bond you buy today, if interest rates fall in the future you’ll probably be able to sell it at a higher price. That dividend rate on the preferred is fixed, similar to how the coupon payment on a bond is fixed, and it may be perceived as more (or less!) relatively attractive to investors in the future than it is today.

Most of the time, I would say, preferred stocks as an asset class don’t make a whole lot of sense, you can get the same general exposure to income and growth by using a mix of bonds and common stocks… but they’ve always had some popularity among income-focused investors, and under a certain set of circumstances they can provide a little capital gains boost, too, if you buy low and rates fall (or sentiment about the company improves dramatically) in the future.

So…. which ones does Teeka think we should buy?

The one he gives away as his “freebie” is “VIP shares” in JP Morgan, which, of course, would mean JPM Preferreds. He specifically calls out the JPM Series K preferreds (JPM/PK, JPM-PK, JPM-PRK, etc. — different brokers use different ticker logic), which he says are trading at about a 30% “discount” to their $25 issue price and paying a 6% dividend yield.

JPM common stock carries a dividend yield of about 3% right now, and that particular tranche of preferred stock has a coupon of 4.55%… but it is also trading at about 21% below par, at about $19.50, so that means the effective yield is just under 6% (it was at a 30% “discount” a few weeks ago, but interest rates have eased slightly so it has come back up a little).

JPM is probably the safest and most-respected large bank, so their preferreds generally yield a hair less than most others… but all the “big and safe” banks are likely to have preferreds that trade at similar yields. Bank of America (BAC) preferreds are mostly trading at a yield of 5.9%, too, and have been in the $19-21 range lately as rates have risen. Capital One (COF) is not quite on the same tier as those guys, so their preferreds yield a bit more, recently around 6.6% (COF/PJ, which is around $18 today). Those “big and safe” banks probably will bounce back, absent a surprise banking crisis, they’re doing pretty well right now… but whether the share price of the preferred stock bounces back mostly depends on where interest rates are in the future.

That’s the big risk I see to the “2X your money” scenario (let alone the more ambitious goals Teeka hypes): If prevailing “safe” interest rates stay in the 4%+ range or even go meaningfully higher, or inflation stays very high, these preferreds are not going to return to $25 anytime soon. Until then, though, you do get your dividend, and with these big and solid banks it should be pretty safe.

Teeka did not drop any hints about which other preferred shares he likes, sadly, but if you’re betting on the potential of a capital gain because you think the Fed will “pivot” and interest rates will be back to some much lower level at some point in the next couple years, it would make sense to prioritize preferreds that trade at a big discount to that “par” level and therefore likely have a higher current yield. If you want to get down below $17-18 for a preferred stock, you’re probably going to have to bet on companies that are probably much smaller and riskier than JP Morgan or Capital One.

There are a lot of places you can go to look for preferred shares, which are not standardized and can be a little tricky to fully understand — Preferred Stock Channel is one good site I like to check that offers pretty easy browsing, QuantumOnline is probably the best source of data on thousands of preferreds and other income investments, but it doesn’t track current prices, and there are others (Stock Market MBA has a nice screener that includes some preferreds, for example, though it’s a small part of the universe).

And investing in these kinds of securities does require a little bit more research, because many companies have a lot of different tranches of preferred stock, usually designated by letters (Preferred A, Preferred B, etc.), and there are a lot of variables — some preferreds have suspended their dividends/distributions to conserve cash flow, even if they’re obligated to “make up” those payments in the future (a lot of REITs suspended their preferred dividends during the COVID shutdowns, for example), some are eligible for lower dividend tax rates and some are not (in general, bank preferreds often are, REIT preferreds usually aren’t), some have been or could be called for redemption and some don’t include that feature, most offer cumulative rights to dividends… but some do not, many are attached to public companies, but for some the common equity is private, so it’s harder to access the full financials for the business, some are convertible into common stock, etc.

There are almost endless opportunities to dig in deep and really get lost in preferred shares, which can be fun for me, sometimes you find a fascinating story of a downtrodden stock that you can’t believe has survived this long, but reading this stuff is definitely not everyone’s cup of tea. I was just browsing some preferreds that carry high yields or are otherwise somehow different or interesting, for example, so in the absence of any teases from Teeka about what he likes, I’ll run through some examples of the kinds of things you might see in the “deeply discounted preferreds” space (these are not investments I recommend, to be clear, just some examples):

PG&E (PCG) has several different preferred shares tied to that California utility operator — PCG/PC is a non-cumulative preferred without a redemption option by the company, so it will probably pay its $1.25 annual dividend in perpetuity… and it’s trading down to under $17 now, for a yield of 7.5%, but it can’t be redeemed or called, so there’s no real hope for a $25 buyout in some future lower-interest-rate future. Strictly an interest rate and income play, and without that promise that they’ll catch up on any dividends they have to miss.

But strangely, if you look at the details, you can get about the same yield from PCG/PD at the same price with a cumulative promise, and with the $25 call option for the company that gives a slight boost to the idea that the shares might get redeemed at a premium someday. The two have traded down together with interest rates, but PD seems to obviously be better than PC… though I confess that I haven’t actually read the prospectus for either, maybe there’s something sneaky in there. All of the PG&E Preferreds I looked at trade at roughly that same 7-7.5% yield now, regardless of the specific terms of the preferred stock… and that’s about the only way to get income from PCG as a utility investor, since they suspended their dividend in 2017 when the wildfire liabilities got out of control, and haven’t restarted it.

CorEnergy Infrastructure Trust (CORR) is an odd company, it’s basically similar to a lot of the energy MLPs, they own oil pipelines and natural gas gathering systems, but it looks like they opted to be taxed as a REIT instead of as an MLP, I don’t know why. Maybe they hoped it would get some different shareholders on board, since they’re kind of unique in this space. Like many REITs (and some MLPs, for that matter), they issued preferred shares, their series A is CORR/PRA, and it pays a high current yield. That one is also potentially redeemable, at the company’s option, at $25, and pays a coupon of $1.84 a year (so it was a yield of 7.4% when they issued the preferreds, but now the share price of the preferreds has dropped to $12.50 to make it almost a 15% yield).

The company fell apart dramatically during the early days of COVID, both because oil prices collapsed and because their most profitable asset, an offshore collection system, was put on mothballs because production was stopped by the oil company who used it — so they cut their common stock dividend by about 90%, crashing the share price, though they kept paying the preferred dividend. They’ve had some other challenges since, they’re trying to get rate increases on the California pipelines they bought to replace that Gulf of Mexico income, and that’s tied up in challenges right now, and those troubles are surely pretty evident from the performance of the common stock (which has fallen from the $40s pre-COVID to about $2)… but the preferreds, at least, have only fallen from $25 to $12 (OK, they bottomed out around $8 a few weeks ago… but they’re at $12 now). They’re still paying their small dividend on the common stock, so they have not completely surrendered to pessimism, it was cut from 75 cents to five cents per quarter in 2020 and remains at five cents, though that now represents a 9% yield. It looks like they’re still current on their debt and I think they have another year or two until that debt matures, with some (at least theoretically) valuable midstream energy assets. They’ve missed the recovery of the oil market this year, whether by bad management or by bad luck I don’t know, but maybe they’ll catch up someday. High yield stock, higher yield preferred that has been and probably will continue to be a little safer.

Cedar Realty Trust Preferred B (CDR/PB) — this is a preferred for a small REIT that owned a bunch of supermarket properties but doesn’t even exist anymore, they sold off some assets and the rest of the company was acquired by Wheeler Real Estate Investment Trust (WHLR), another small east coast REIT (market cap around $19 million now, really tiny), which kept those preferreds current instead of redeeming or refinancing them. WHLR is clearly pretty distressed, too, but they do have positive cash flow from their properties, they are paying on their debt, and they have continued to pay dividends on Cedar’s preferred shares… but WHLR suspended dividend payments for their own preferred shares a couple years ago and haven’t restarted them, so who knows what will happen next, it wouldn’t be surprising if they suspended dividends on the CDR preferreds as well.

That one currently trades around $10, with an effective yield of 18% (the coupon is 7.25%, but that’s as a percent of the original $25 offering amount). If things turn up for WHLR and their hodgepodge of east coast retail properties, and they get out from under their debt challenges, maybe the preferreds will rise back up into the $20s someday… we’ll see. Wheeler’s own cumulative preferreds (WHLRD) are also trading at a similar level, around $11, even though they’re not currently paying their dividend — presumably because that “cumulative” part means they still owe the dividend, eventually, and might well pay it if they survive and recover… but some other preferreds for Wheeler trade at a much lower price, WHLRP is a convertible cumulative preferred, which means it’s convertible into common stock and also owes a yield, ($2.25 per year, though payments are also suspended), but the shares are convertible into WHLR at a conversion rate of $5 per share, so that’s not exactly a perk for shareholders right now (WHLR common stock is below $2, and does not pay a dividend currently). And to make it even more convoluted, Wheeler is currently paying interest on its convertible notes (publicly traded bonds, at WHLRL) by giving those noteholders shares of WHLRP instead of cash. You can see how a recovery of the company might well generate great returns for some of these preferred shareholders… but the odds of it working out do not appear to be particularly high, it also seems like there’s some desperation in their moving liabilities around so they don’t have to pay them in cash, and those liabilities compound into an unpleasant end game over time, overwhelming the company’s ability to generate cash flow to service the debts and preferred shares.

That’s not really a company-specific criticism, I didn’t spend enough time on Wheeler and Cedar to have a great handle on how the assets and liabilities match up or get a sense of whether they’ll get their heads above water someday — just a note that sometimes these little preferreds are very odd, and have a bit of a whiff of desperation about them. Most of these kinds of small preferred stocks on sketchier little companies trade essentially by appointment, too, there are often days when no trades happen in WHLRP or CDR/PB.

Ashford Hospitality Trust (AHT) is an example of another small REIT, not nearly as tiny and distressed as Wheeler but clearly under some pressure, that also has a bunch of preferred tranches available — AHT/PD, G, H, F and I right now. They suspended dividends on their preferred shares back in 2020, since they’re a hotel REIT and they were in crisis in that year, but resumed and caught up on those dividends in late 2021 (after doing a voluntary offering to convert the preferred shares to common stock at a discounted price back in 2021, which about a third of preferred shareholders took them up on). AHT has not resumed common-stock dividends, and certainly looks a bit distressed, but they own a lot of properties that are managed by major hotel chains, maybe things will bounce back in the end, and they don’t seem to be overhwelmed by debt or debt service…. and they are still paying those preferred dividends. Looks like AHT/PI is currently the one that’s trading at the lowest price and highest yield, roughly $17 and 10.8%, but other than AHT/PD ($21, 10%), they’re all in the same general price range, and the differences are mostly just because the nominal dividend amount is slightly different so they have to trade at different prices to offer similar yields… and, of course, because these are illiquid and they’re not necessarily buyable at the quoted price in any size.

So while most of the big bank preferreds will trade at pretty similar levels most of the time, ranging these days around a 6% yield, partly because they’re not at all likely to be redeeemed by the issuer at that $25 price in the current environment, and most of them are pretty similar in terms of risk profile when you’re dealing with mega-banks, there are also usually some interesting… or at least unusual… “discounted” preferreds in other sectors.

Some reminders about a couple key terms to keep an eye out for in the names of these preferreds:

Cumulative means that the preferred shareholder has a right to those dividends, and that even if they are suspended for a time (which they can do if they board decides it’s prudent), the expectation is that they will “catch up” by paying those old owed dividends. Those cumulative unpait dividends would carry some weight in a bankruptcy liquidation, too, though the preferred shareholders still come in behind the bondholders.

Redeemable/Callable means that the company can redeem the preferred shares — usually starting a few years after the preferreds are created, and usually at the original price, $25 (some are $50 or $100, but $25 is typical). Sometimes the redemption/call price is slightly higher, or adjusts over time, but usually it’s fixed. Typically, companies only redeem their preferreds if they’re more expensive than other funding currently available to them… though sometimes they just do it because they have extra cash on hand and want to remove the liability of those dividends.

Perpetual means that there is no end date or maturity date. That’s true of most preferreds, especially those that aren’t convertible, though some preferreds do have an end date and some provision for how to liquidate the shares. Basically, since most preferreds are perpetual and callable, the “perpetual” part usually just means that it’s perpetual until they feel like redeeming them at par (again, usually $25).

Participating preferreds are pretty rare, in my experience — they have their usual fixed preferred dividend and are generally like a regular cumulative redeemable preferred stock, but also have some sort of conditions under which they’ll pay bonus dividends and let the preferred shareholder “participate” more in the success of the business (for example, if the common stock dividend grows above a certain level).

Convertible preferreds are the more likely path to “participating” in the success of a company for preferred stock investors — convertible means the preferred shares can be converted into common stock on some predetermined ratio or at a predetermined share price (there are also convertible bonds and notes, sometimes even publicly traded ones, they behave similarly). Sometimes this is mandatory, requiring the conversion if the shares rise above a certain level, or after a certain date, sometimes it’s mostly at the preferred shareholder’s option.

Technology stocks and younger growth stocks sometimes get into this game, too, though not really as a way to offer income to investors — these “growth” companies often raise money by selling convertible preferreds that either have no dividend or pay an extremely low yield. They do this because it lets them raise cash but postpone the dilutive effect of all those new shares, and in those cases all the investor’s expected gain will be from the fact that they hope the stock rises substantially… though investors also do get the bonus of being a step above common shareholders in the priority list if it all goes to hell in a handbasket.

There are some established and dividend-paying companies that have convertible preferred shares, too — Paramount Global (PARA) caught my eye recently because it’s been tossed around as a guru favorite a few times (Berkshire Hathaway increased its stake in Paramount recently, for example), and they have an old series of mandatory convertible preferreds that were created back before the CBS/Viacom merger. Those trade at ticker PARAP, and were issued at $100 with a 5.75% coupon, and they’re currently trading down at $30 so that represents a yield of almost 20% today… so it looks at first like it’s at a big fat “discount” because it was issued at $100 and is trading 70% below that, with that nice big yield… but there’s a catch. That “Mandatory” part of the name is no joke, in April of 2024 these convertible preferreds will automatically be converted into common stock in Paramount. Assuming PARA shares are below $85 at that time, as seems likely (they’re at $18 right now), then each share of PARAP will become 1.1765 shares of PARA.

Those future events make you do some math, but at least it’s all knowable — so in this case, there are six quarterly dividend payments due between now and conversion in the Spring of 2024, so that’s $8.62 worth of dividends per preferred share that you’ll get from PARAP (those are taxable, of course, if you buy in a taxable account, but they are eligible for the lower dividend tax rate). If you were to convert today, then 1.1765 shares of PARA would be worth $21.22. Add those together and you get $29.84, and PARAP is currently trading at $29.20 or so. Which means it’s not exactly an exciting bargain, any real boost you’d get would be caused by PARA shares going up — and PARA itself pays a pretty high dividend these days too, of about 5%, so if you want exposure to PARA and what its shares might do in the next couple years, you don’t really gain much or lose much by buying the preferred shares instead of the common equity. Unless Paramount goes into bankruptcy in the next year, which doesn’t seem very likely.

Every situation is different, though, and sometimes convertibles do turn out to make more sense — getting a little more stability and a little less upside, but with at least some upside exposure to a rising share price. There aren’t a lot of convertible preferreds that also pay meaningful current dividends, unfortunately, but sometimes they become fashionable and start to crop up again.

So in the absence of any real teased details about Teeka Tiwari’s recommended Preferred Stocks, I’m afraid I’ve blathered on quite a bit about the general idea and given you nothing very lusty to grab ahold of. Still, that’s basically the story — preferred stocks are generally more stable than common stocks, with less upside and higher yields, and in the past they’ve sometimes bounced back faster than common stocks after a crisis… but they’re also very much interest-rate-sensitive investments, most of them are bought for yield and will trade up or down based on whatever the prevailing yields might be. The preferred stocks mostly bounced back pretty strong from the 2008 crash, and Teeka clearly believes they’ll do so after this current weakness as well… but if interest rates remain high or climb higher, we may well see even the “blue chip” preferreds, like the JP Morgan one he shares, remain well below their $25 “par” price for a long time.

And yes, as Teeka Tiwari noted, there are a couple dozen “Wall Street Funds” who specialize in preferred stock — including some mutual funds and ETFs. They tend to be dominated by the big bank preferreds, with a few utility preferred tossed in, but you could check out iShares Preferred & Income Securities (PFF), First Trust Preferred (FPE), Invesco Preferred (PGX) or Global X US Preferred (PFFD)… or on the mutual fund side, Nuveen Preferred (NPSRX) or Cohen & Steers Preferred (CPXIX).

Just to give a little sense of how this niche has done, here’s (almost) a decade of returns for all of them — you can see that the differentiation is pretty limited, and that they all benefited greatly from falling interest rates and suffered when interest rats climbed this year… but the mutual funds did a little better over time than the ETFs (probably in part because preferred shares are somewhat illiquid, which is hard on ETFs, and ETFs tend to be more tax-efficient, so they may still have worked out better in the end). For context, I also threw in the S&P 500 (in brown) and a long-term government bond ETF (TLT) in dark green, so you can see how they provide some middle ground between the two.

And yes, during the 2008-2009 crisis that Tiwari notes, preferreds did generally bounce back faster and stronger than common stocks, though that disparity evened out within a few years — most of those funds and ETFs didn’t exist back then, but the Nuveen Preferred mutual fund did, here’s that charted against he S&P 500 going back to 2007. Those few years when purple is higher than orange from 2010-2014 are essentially what Teeka is talking about from a big picture perspective.

So that leads to the big question…. Will the next crisis work out similarly?

Gosh, I’m out of time. Darn. I’ll have to leave that answer to you. If you figured out the future, please do let us know in the comment box below. Thanks for reading!