The A & P and the J

At the beginning of the month, I wrote:

Are you old enough to remember ‘the A&P’? The Great Atlantic & Pacific Tea Company Inc., symbol GAP, runs hundreds of supermarkets under various monikers – including the tony Food Emporiums in New York. It’s a pathetic shrimp next to Amazon – it has a total market cap of about $266 million, down about 75% in the past year, to Amazon’s still hefty $5 billion or so. And it sells shrimp! The company’s ‘9.75% preferred J’ stock pays a preferred dividend of $2.34 a share and traded yesterday under $12. I had previously bought some for $10.50. If the company goes broke, you might lose everything. Otherwise, you get about 20% a year on your investment, plus the possibility of a double if the preferred were ever retired (the call price is $25). There are a lot of high-yield speculations like that these days (thanks to the estimable Joe Cherner for pointing this one out), which is why a lot of the smart money seems to be buying high-yield ‘junk bond’ funds and the like. A&P recently suspended the dividend on its common stock, but who knows? It might be able to keep paying the preferred dividend.

Since then, this preferred stock (symbol: GAJ)has jumped to 18-and-a-fraction, closing yesterday at 17. Even at 17, that’s up more than 40% for the month – and it has a 58-cent quarterly dividend, payable to those who bought before January 12, en route, adding another 5% or so.

I am beginning to feel pretty cocky about this, which is always a bad sign. It probably portends a house fire or some other awful thing. So if you did buy it at $12, sell it so I can know that you locked in your 50% or so in a month. Surely, my peace of mind should govern your investment strategy – no?

No?

Well, OK, then, if primitive superstition is not the right guide here, what is the sensible way to approach this?

In my own case, I am holding on, for three reasons. They may or may not apply to you.

I don’t want to sell the shares I bought in a taxable account, because I don’t want to give what would be about 40% of the gain to Uncle Sam. It’s a gamble to keep my chips on the table another 11 months . . . but the difference in tax rates – 40% now versus just 20% if I wait (and the possibility of continued fat dividends) – tilts the gamble, at least as I see it, in my favor.

I don’t want to sell the shares I bought in my tax-sheltered retirement account, because – although there’d be no immediate tax on the gain – neither would there be tax on those outsized dividends, if they keep coming. Were it not for the risk of the investment, my retirement plan would clearly be a better place for this high-income investment.

I foolishly bought so little GAJ that, really, the risk is not significant to me. If A&P should go bust and lack the money to pay the preferred shareholders a penny, let alone the $25 face value of the shares, my life would go on pretty much unaffected. Oh sure, I would feel stupid. I would feel angry for letting a bird in the hand slip off beyond the rainbow. But what else is new? Trust me: If I had a nickel for every dumb investment decision I’ve made, I’d be a rich man today.

The logical way to look at this in Claudius’s day was to take the bird in the hand, disembowel it, and examine its entrails. This method, although gorier, actually scores approximately as high as modern Wall Street research in pegging when to buy or sell a stock.

The decision with GAJ, like the decision on when to sell any stock, is basically two-fold:

First, is how it fits into your overall plans. For example: Are you approaching a time, a year or three out, when you might actually have a serious need for the money? If so, sell.

Second, if you didn’t already own it, would you buy the stock today? Tax considerations aside, holding GAJ that you bought for $12 when it’s now, say, $17 or $18, is like buying it for $17 or $18. If you had $1,700 or $1,800 in cash, and thousands upon thousands of investment alternatives, is GAJ the one you’d choose? If so, don’t sell!

If you hold on, you’d still be getting a hoped-for $2.34 dividend – which is pretty great – but only so long as the Great Atlantic & Pacific Tea Company is able to make good its dividend (or, if it should fail, finds enough money in liquidation to make good the $25 face value of these shares). In liquidation, the word “preferred” makes you feel like one of those frequent fliers who get special treatment. Until you realize that there are gold members ahead of you, and platinum members, and executive platinum members – not to mention those one-in-a-million travelers with actual $1,774.25 first-class New York-Chicago tickets, who come ahead of everyone. In the case of a bankruptcy, these fliers are called, among others, “employees,” “creditors” (such as A&P’s suppliers), and “bondholders.”

Assuming the $2.34 were assured, and assuming in your case that selling would net you, say, $15.50 after tax (depending on your tax bracket), then by selling you trade $2.34 a year for $15.50 in cash now. That works out to a 15% annual yield you are kissing good-bye ($2.34 divided by $15.50 equals 15%).

But will A&P make it? Or have the funds, in liquidation, to pay off its preferred stockholders?

Go down to your local A&P, if you can find one, buy a chicken, and study its entrails. Then decide. I hereby disclaim any further responsibility. You made 50%, and that’s the end of it, as far as I’m concerned.

As for the little basket of A-Much-Smarter-Person-Than-Me’s stock picks from last March 14 . . . that group is up about 55%. Not bad with the NASDAQ down nearly as much over the same time period. I disclaimed any further (non-existent) responsibility for these stocks months ago, once they’d climbed about 40%, although I said I planned to hold most of my own shares.

And as for the August 22 stocks I suggested that one might buy with a five-year time horizon – a ragtag assemblage I foolishly cobbled together myself – they are down about 3%. But the night is young. Given my knack for this, by 2005 they could all be in the toilet. (If you’re keeping track of this little portfolio, note that holders of CMM received a distribution of preferred G shares that should be factored into your tally.)