Playing Offense In A Rising Interest Rate Environment
SPEAKER: Damon Southward – Senior Market Strategist (SCALP)
Overview
 REITs (What to sell, what to buy)
 Preferreds (8-9% yields & going higher with
rates; great oppty for income)
 Improving Economy Plays (double-digit yield
plays amid improving economy)
 Distressed Opportunities (100% plus upside
opptys as balance sheets improve)
 Options (Portfolio Hedge/Income)
Damon Southward - ScalpTrader (SCALP)
REITs Will Fail; I’m a Buyer
Property REITs have been a safe-haven
for Income investors
 REITs (VNQ) up as much as 20% in ’16
 VNQ down 11% from late-July 52-wk high
 Prepare Buy List of individual names, as
some stories will continue to perform
Damon Southward - ScalpTrader (SCALP)
NXRT On My Buy List
NexPoint Residential Trust (NXRT)
► Apartment REIT
 4.5% yield
 14% off 52-wk high set in Sept
 Class A is overbuilt and will correct
 Class B Focus (rent range $600-1000)
 Strategy generates +20% ROI
Damon Southward - ScalpTrader (SCALP)
Preferreds
 Higher up the capital structure than
common stock.
 Trades like a bond, but chance for capital
appreciation if purchased right.
 Periods of market volatility can create
tremendous long-term buys.
Damon Southward - ScalpTrader (SCALP)
Current Environment for Preferreds
 A race to get deals out the door before Interest
Rates rise.
 Market volatility in early-2016 has led to an
improvement in quality of Preferred offerings.
 Not unusual to see 8-9% yields on new paper
 Opportunities for yields of 9-10% as rates rise
 I expect to add a number of new positions near term
Damon Southward - ScalpTrader (SCALP)
Preferred Example
Teekay LNG Partners LP 9.0% Preferred
 Ticker: TGP/prA
 Distribution coverage of 6.7x on common
 Preferreds must be paid before common
stock distribution
 Distribution is Cumulative
 Long-term, contracted revenue ($11.8 bln
under contract)
Damon Southward - ScalpTrader (SCALP)
Improving Economy Oppty
I expect to see Materials and Energy
stocks outperform in improving economy
 e.g., Coal has been one area I’ve been adding
exposure
 coal prices up dramatically off recent lows
 able to buy stocks with 20-25% yields
 in Energy, buying companies that have
emerged from bankruptcy, erasing debt
Damon Southward - ScalpTrader (SCALP)
Distressed Preferreds
 As Energy prices have improved, have seen
spectacular rebound in prices of Distressed
Preferreds
 CHKprD is an example of a name we have played
for outsized gains
 Added a new name to portfolio recently that traded
at 50% discount to par and plans to reinstate
distribution in April.
 Several new names on radar
Damon Southward - ScalpTrader (SCALP)
Options
Selling Puts on stocks that I would like to
own at lower prices.
 Either generate a 100% return or get to own
the stock at a lower price.
 Example: TK Jan 2017 $5.00 Put sold for
$0.55 when stock trading at $7.11)
 Stock now trading at $7.95 (also bought
common); expecting to generate 100% return
Damon Southward - ScalpTrader (SCALP)
Playing Offense In A Rising Interest Rate Environment
Thank you for your participation.
For questions or feedback please contact
[email protected]