Re: Security Analysis
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You get something like 25-30% ROI a year, no?
And preferred stocks don't get that sort of returns do they?
Edit: Basically, do you buy preferred stock often?
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No, I've only bought one. Ben Graham has warned about preferreds, since they usually don't have voting rights and company management usually manages the company for the common stock's benefit. I.e. management usually has options for common, so they won't care about your preferred. And unlike bonds, they aren't secured, so if a liquidation or bankruptcy happens, preferred gets paid before common, but after all other debts.
The one I'm in is a special high risk/high reward kind of situation. It's a biotech company that has shut down it's existing business, but still has around $20M in cash, no debt other than it's preferred. Management is trying to sell the company and/or technology. The 2m shares of preferred is owed $20M. So the preferred has $10 per share "liquidation preference". And the common shares are worthless in liquidation, but might be worth something in a sale or purchase of another business.
I've been able to buy the preferred shares for $3.75. My risk is the company burns the remaining $20m trying to launch another business. In that case I'll have to dump my shares for whatever I can get. My hope is they decide to liquidate, and then I'll get close to $10 (probably $6-$8 after liquidation expenses). They are still paying interest, I get 15 cents every three months. And in this case, the board of directors has three members who own large amounts of preferred, so I'm really betting they'll overcome the natural inclination of mgmt to try to create value for the common at the expense of the preferred.
So you can see this is major exception for me, as I never buy preferreds. Preferreds are usually viewed as safer than common stocks, since they provide income and have a little more safety, but offer less upside. We'll see if this "exception" works out, if it doesn't, I'm unlikely to try this again.
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