Preferred Stocks

Preferred stocks have risen considerably from their lows last year. In fact, PFF (US Preferreds) outperformed the S&P 500 by 130 basis points excluding dividends. Given that the lion's share of the preferreds universe is financial, this isn't too surprising. The flip side of this rise is that preferreds are getting close even not having already exceeded their call price. Of the top 5 holdings in the PFF portfolio, I could find call information for only three of them. The top holding, GM series B preferreds trades at 42.23 but has no call feature. It is, however, convertible. The 2nd top holding HCS series B (HSBC Bank) trades at 27.33 and also has no call feature. It is not convertible. The 4th largest holding is WFC series J (Wells Fargo) which is callable at 25 but currently trades at 29.63. That amounts to a potential 15.6% loss right off the bat from a call. WFC.PFJ yields 6.78%, so you are no where near compensated for the call risk. That said, I was surprised that 2 out of the top 5 holdings did not have the call feature, so PFF, though still quite risky, may be more resilient than meets the eye. In the very least, we cannot say that its entire portfolio is callable at a moment's notice.