'Circus,
For sure, TELZ is ‘risky’, or it wouldn’t have come to market with the high coupon it did, nor be trading at the discount to its call price that it is. But “How risky?” is the research problem. So here’s some of the checklist I run through when trying to vet a preferred.
(1) Is it trading at a prem to a stated call such that YTC would mean a low total-return or even a loss? (Explanation: I care nothing about CY. It’s ‘total return’ I worry about, and TELZ gets a pass.)
(2) Does the issuer have a common, and what does Simply Wall Street --a fundie website I trust-- say about the financial health of the company and its current price in terms of its ‘fair value’? (TELL is ‘marginal’ on both metrics, but not an instant reject. Hence, TELL gets pass, but a weak one, as does TELZ.)
Clearly TELZ is a ‘spec-grade’ credit, probably a single ‘B’, which is as low as I’ll buy. Therefore, my position is going to be small, and here’s where I borrow from my bond investing. By and large, a single corporate isn’t marketable. Yeah, I’ve bought and sold singles. But the lowest executable min is typically two, with five being common. But I refuse to bet that big. If I can’t get just 2 of a spec-grade issuer’s debt, I don’t buy. I’ll go 5 with the mid-tier stuff and ten with top-tier debt.
For the sake of easy understanding, let’s call those three tranches ‘Defensive’, ‘Enterprising’, and ‘Speculative’, and I fund them on this scheme: 2x (Defensive), 3x (Enterprising), 1x (Speculative) on the basis of ‘par’, not ‘price’. Thus, I’m typically having to pay a prem for the best stuff. I get the mid-tier stuff at a slight discount. The lower-tier stuff at a significant discount. And I avoid the lowest-tier stuff, the triple/double/single C’s. But here’s where this scheme makes it possible to traffick in junk. I’m never betting much money on any of the risky issuers. But I am gaining enough exposure to the tranche’s higher returns that wins likely exceed losses by enough of a margin that “playing it totally safe” is being too cautious. My mantra is this. “Buy widely. Buy small.” Thus, even though TELZ is a risky credit, I need to buy some in order to reduce the ‘issuer-specific’ risk that would come if I were making focused bets.
Explanation: In Morningstar’s terms, I’m a ‘spectrum income’ investor, not a dedicated ‘junk-bond’ investor. Same-same with what I’m trying to do with preferreds. Schwab’s scanner for preferreds creates five tranches on the basis of CY: 0%-2%, 2%-4%, 4%-6%, 6%-8%, and >8%. By and large, the 0%-2% stuff isn’t worth looking at, though I’ve bought some of it, e.g., TVA and TVE (if I’m remembering the tickers right). But I’ll trade out of it when I can gain a ST profit. The 2%-4% tranche also offers slim pickings. But I have no problems with buying some of it, just because it’s unlikely to cause me grief. (That’s the “buy’em and forget 'em” stuff.) The next two tranches are where most of my buying happens. The 8% and better tranche is a shopping list I scan. But very little money gets put to work there, and as much to see what might happen as to turn a profit. Hence, I was glad you brought TELZ to the attention of the forum.
Arindam