Investing & trading in distressed securities and turnaround situations can be an extremely profitable strategy if done right. Few people have the time or the knowledge that it takes to identify the best opportunities in this category. However, our ScalpTrader shares his expertise in this area with subscribers so that they can also participate in these opportunities.

CHKprD +220%


11-Apr-16
10:04 ET		 SCALP ScalpTrader: Spec Trade
• This morning, I've purchased some shares of the suspended Preferreds of Chesapeake Energy and Legacy Reserves. The symbols of the Preferreds I'm buying are CHK/prD and LGCYO.
• On March 31, I noted that I was researching these names and had already started buying LGCYO and HKRCP.
• Today, I added more LGCYO, as Oil prices rally and the common stock surges over the past couple of days. LGCYO currently trades at $3.18, or 13 cents on the dollar for this $25 par Preferred.
• I established an initial position in CHK/prD (19.46) based on the positive borrowing base redeterimination and the price extension in the common shares. This is a $100 par Preferred that is currently trading for just under 20 cents on the dollar.
• As I noted in the March 31 comment, there could be tax implications to owning suspend Preferreds. This is why I've placed the purchases in a tax shielded account. I've checked with my accountant and feedback is that this should protect against phantom distribution income. You should certainly check with your own tax professional if you decide to speculate in the shares of suspended Preferreds. I would note that I have not placed shares of suspended MLP common units in tax shielded accounts b/c MLP common units apparently don't have the same protection.
• All of these Preferreds are Cumulative, which means that the company has to repay accrued distributions before they can pay a dividend on the common stock or resume distributions on the suspended Preferreds. While I believe that maybe one out of three will eventually resume distributions, my expectation is that eventually the Preferreds will be exchanged for common stock. This is why a strong stock price is important in my strategy, as the stock can be used as currency to retire certain outstanding obligations.
• Note that it could take 6-24 months (or more) for these situations to play out. That is the nature of distressed investing.

23-Jan-17
10:47 ET		 SCALP ScalpTrader: CHKprD -- Would look to take profits on 1/2 of remaining CHKprd position for approx. +220%. (62.50 +6.70)
• On Friday, Chesapeake Energy (CHK) announced it would restore distributions on its Preferred securities. Moreover, since the Preferreds were of the Cumulative variety, the company will issue a make up payment of deferred distributions. CHKprD will receive a make up distribution of $4.50 per share.
• Recall that we purchased shares of CHKprD on April 11 at $19.46. On news of the distribution resumption, the Preferred shares have traded to $62.89 this morning. I think $65-70 is about fair value for this security, so I suggest trimming 1/2 of the remaining position and collecting the make up distribution on the rest.
• Note that the record date to receive the distributions that are in arrears is Feb 1.


BRIEFING TRADER SUBSCRIBERS SAY:
"Oh I forgot to mention, CHKpD. I'm keeping the last 500 shares I own, not going to trim. That was a great call by the way. I remember buying Ford preferred "S" stock for $5.50 and Ford bought it all back from me at issue price of $50 and paid the arrears dividend. I made a ton of money on that one. To be fair it was a huge risk at the time."


LGCYO +260%

31-Mar-16
09:56 ET		 SCALP ScalpTrader: Distressed Energy
  • I spent most of yesterday looking at the Preferreds of distressed Energy companies.
  • Examples include Preferreds of CHK, HK, LGCY and VNR, which are trading in prices ranging from 3-18 cents on the dollar.
  • I actually bought a little LGCYO at just under 10 cents on the dollar ($2.48) as a spec play.
  • I put it in a tax-shielded account b/c some Cumulative Preferreds are taxable even if distributions are suspended (phantom distributions).
  • Another that I own is HKRCP, which is a $1000 par Preferred of HK (distribution is suspended), that trades at $30 (3 cents on the dollar).
  • Today, I want to take a look at the VNR series of Preferreds following their asset sale and the CHK prD, which is a $100 Preferred of CHK that is trading at $17.50.
  • All of these Preferreds have had their distributions suspended. They are Cumulative, which means that missed distribution payments have to be made up before normal payments can be resumed.
  • However, what I'm really betting on is that some of these companies will make offers to exchange the Preferreds for common stock at much higher prices than the Preferreds currently trade.
  • My approach is to accumulate on weakness in distressed Preferreds that have common stock prices/market caps that make a Preferred-for-Stock exchange viable.
18-Apr-16
10:00 ET		 SCALP ScalpTrader: LGCYO -- I'm taking advantage of this dip to add some LGCYO shares back to the Spec Portfolio (3.40 -0.43)
  • Note that again I've put these shares in my tax-sheltered account due to the "phantom income" issue associated with suspended distributions on certain Preferreds.
  • Recall that I suggested taking some profits on this position on April 13 for +91% on the 1st piece and +49% on the second piece.
24-Jan-17
10:37 ET		 SCALP ScalpTrader Update -- Taking profits on 1/2 of remaining LGCYO position for approx. 260% (11.50 -0.01)
  • This is a position that we built in March/April of 2016.
  • Advances in my basket of Distressed Preferreds have been spectacular.
  • Yesterday, I closed out more of the CHKprD position for +220%.