Buy The Pullback In This 11% Yielder With A Recent Analyst Upgrade

| About: KCAP Financial (KCAP)

KCAP Financial, Inc., (NASDAQ:KCAP) just announced a secondary stock offering for about 4 million shares. This type of event is not uncommon in the sector that KCAP operates in, but it still often causes the stock to drop, which can provide investors with a solid buying opportunity. KCAP intends to use the proceeds for general corporate purposes, and this includes additional investments in portfolio companies that can generate future returns for shareholders.

KCAP is a business development company or "BDC," which originates loans and makes equity investments in a range of industries, which include: healthcare, manufacturing, real estate, transport, finance, electronics and others. KCAP uses leverage to enhance returns for shareholders. By borrowing money at low rates and investing those funds in higher-yielding loans and investments, this company is able to generate strong returns for shareholders. Dividends are paid out on a quarterly basis, at a rate of 28 cents per share. This provides a yield of around 11%, which is extremely attractive in a low-interest environment.

The offering size of about 4 million shares would indicate a value of around $40 million for this deal. Just to put it into perspective, KCAP has a market capitalization of about $267 million, so while the offering is not insignificant, it is also not a major amount of dilution.

This company has been reporting solid financial results and it announced net investment income per share of 25 cents for the third quarter of 2012. This and other factors caused analysts at Zacks Equity Research to give KCAP shares a "strong buy" rating on December 31, 2012. Zacks highlights a price-to-book ratio of just 1.2 and the strong income potential as positives for investors to consider.

The use of leverage does increase risk and stocks like KCAP were hard hit during the financial crisis and even during the recent recession. (Take a look at the 52-week low, which is just $5.51 per share.) An investment that offers yields of around 11% when money market rates are below 1%, should be an indication that investors could lose money, especially if the economy declines and creates difficulties for companies to make loan payments to KCAP. However, with signs that the housing and jobs market is getting slightly better, these risks do not seem to be at heightened levels at this time. With KCAP shares pulling back into the $9 range again, it could be a solid buying opportunity for income investors to consider. I have found that stocks like this usually drop for a couple of days or so after a secondary offering is announced, so it could pay to wait and let the stock settle before beginning to accumulate it.

Here are some key points for KCAP:
Current share price: $9.89
The 52-week range is $5.51 to $10.57
Earnings estimates for 2012: 87 cents per share
Earnings estimates for 2013: $1.02 per share
Annual dividend: $1.12 per share, which yields about 11%

Data sourced from Yahoo Finance. No guarantees or representations
are made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.