Fifth Street Finance: A Dip In This 11% Yielder Is An Opportunity

| About: Fifth Street (FSC)

Fifth Street Finance Corp. (NYSE:FSC) is a business development company which makes loans and investments in small to medium sized businesses. It invests in many industries which include healthcare, manufacturing, energy, defense, technology, marketing and others. On April 10, this company announced a secondary offering of 13.5 million shares which were priced at $10.85 per share. This offering raised about $146,475,000. The stock dropped about 30 cents on this news and closed at $10.70 on April 11th. This is a buying opportunity for income investors to consider because recent history shows that investors who buy stocks like this one, on a secondary offering pullback, are often rewarded for doing so.

Fifth Street Finance shares were trading for around $11.07 on April 10th, but then dropped in after hours trading when the announcement was made. The pullback caused the stock to close at $10.70 on the first full trading day, after the announcement was made. Buying now makes sense because the share offering is relatively small at just 13.5 million. Compare this to a total of about 106 million shares outstanding, and you can see why the market can quickly absorb the extra shares. Furthermore, this stock could be poised to bounce back quickly to the $10.85 offering price and continue back to over $11. Here's why:

Buying business development stock offerings (when the stock price dips), has been paying off. For example, Resource Capital Corp. (NYSE:RSO), (another business development company), announced a secondary offering of 16.25 million shares on April 10. These shares were priced at $6.33, and the stock briefly dipped below that offering level. However, by the next day, the shares were trading back up to $6.35, which is even above the offering price. This pattern is likely to repeat with Fifth Street Finance Corp., because investors are hungry for yield and that could take the stock back over the $10.85 offering price very soon.

The dividend is very attractive with a yield of nearly 11%. This company pays a dividend on a monthly basis at a rate of 9.6 cents per share. Since most companies pay on a quarterly basis, owning this stock means it is never a long wait before investors get paid more dividends. Furthermore, since this company invests in many companies and a variety of sectors, it offers diversification which reduces risks for shareholders. Plus, with the economy showing positive signs of recovery, the downside risks appear limited, especially with the shares trading below $11. In addition, the dividend looks safe. On March 27th, analysts at J.P. Morgan (NYSE:JPM) upgraded the rating on this stock to overweight based on competitive advantages it thinks Fifth Street Finance has and said: "We view FSC's increasingly secure 10.6% dividend yield as attractive."

In addition to a very generous yield, this stock has upside potential, especially for investors who buy the recent pullback. Just recently, analysts at UBS (NYSE:UBS) reiterated a buy rating on the stock and set a price target of $11.50. Investors who buy now could end up with combined gains of close to 20% over the next 12 months, based on the dividend and capital gains potential to $11.50 per share.

Here are some key points for FSC:
Current share price: $10.70
The 52 week range is $8.99 to $11.08
Earnings estimates for 2013: $1.14 per share
Earnings estimates for 2014: $1.17 per share
Monthly dividend: 9.6 cents per share, which yields about 11%

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

Disclosure: I am long FSC. 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.