I was looking at a client's account today for the purpose of determining an annual fee. My firm, Portfolio Guru, LLC, provides asset management services on a fee-only basis, and the fee for next year's service is based on assets under management on the anniversary date. This client signed up with me on March 22, 2013.
At that time, the two securities I was most frequently buying for my clients were the Series A preferreds of Gastar Exploration (GST) and the Series C preferreds of GreenHunter Resources (GRH). I bought both for my new client in large quantities on March 22, 2013.
I've mentioned both securities frequently in this space, and, in fact, my first column for Real Money came within two months of that portfolio's initiation date and featured Gastar Exploration.
So, I practice what I preach, and I buy what I write about. Preferreds are often perceived as the boring cousins of common stock, senior in the capital structure, but junior in terms of media coverage and public awareness. Just fixed-income instruments in a thin disguise with little chance for upside and suitable only for bond-loving coupon-clippers.
Well, that was never really the case for these companies, as emerging growth players in the energy drilling (Gastar has oil assets in Oklahoma and natural gas assets in West Virginia) and services (GreenHunter operates saltwater disposal wells, serving the natural gas drillers of Appalachia) industries.
However, a look at the charts of those two preferreds from the June-October 2014 time frame might have indicated that the market had conferred fully grown status on both companies. GRH-C had finally started to trade at par, and GST-A at a consistently solid premium to par.
And then the bottom dropped out.
Things started to weaken with a mid-October swoon following the weakness in crude prices and then followed the disastrous OPEC non-announcement on Thanksgiving Day. Both GRH-C and GST-A began to plummet, along with many other energy preferreds. As a shareholder and an asset manager, I can only describe that period as ugly, although at the time I was using other, less-printable verbiage.
The re-valuation was stunning both in its swiftness and magnitude. GRH-C fell to a low of $10.05 on Dec. 8 (or 40 cents on the dollar compared to its $25 par value) and GST-A fell to a low of $15.90 (64 cents on the dollar) on Dec. 16. At their lows, GRH-C had fallen 62% from its high of $26.49, reached on July 24, and GST-A had fallen 39% from its high of $25.98, reached on Aug. 26.
Those moves in a nearly four-month span were so drastic that I had to ask myself on a daily basis, "Does the market know something I don't?" It is the most crucial question in investing.
I have spent so much time at conferences chatting with GreenHunter's CEO Gary Evans and COO Kirk Trosclair and Gastar's CEO Russ Porter and CFO Mike Gerlich that I knew the market didn't have any company-specific knowledge that I didn't.
So I bought more of both GRH-C and GST-A.
My client accounts became heavily weighted toward the energy preferreds as I reached to lock in >20% yields. I had to sell securities that I knew were undervalued at 85 cents on the dollar so I could buy preferreds that were screaming buys at 60 cents on the dollar. It was certainly not a boring time.
But things have recovered somewhat, and that's where I go back to my account review today. When I looked at my client's books, I noted that GST-A ($21.37 vs. $19.51, or 9.0%) and GRH-C ($19.22 vs. $18.75, or 2.5%) actually finished Thursday's trading above their closing prices on March 22, 2013.
So those original positions both show capital gains in addition to the enormous income generated. GST-A has returned $4.13, or 21.2% of the initial investment in dividends (including one payable in a week and a half), and GRH-C has returned $4.79 or 25.6% of the initial investment.
Those are terrific cash returns in a low-yield environment, especially considering the principal value has increased in both cases.
And that's the lesson here: patience. My strategy combines long-term outlook with the opportunism granted by the reinvestment of those payments. Rest assured, I never let any of the 24 monthly payments from this client's holdings in GRH-C and GST-A sit in her account for more than a day before I reinvested them in something else. But buying-and-holding the core securities allowed me the freedom (and high yield) to reinvest those dividends in the first place, and that is a lesson I will always remember regardless of crazy swings in the markets.