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Remember this gem from last summer? Stifel Nicolaus and Greg Mason slapped a “sell” on our beloved American Capital Strategies, Ltd. (ACAS) saying:

We believe the probability of bankruptcy has risen significantly, which could result in a $3-4 stock price as ACAS restructures its debt agreement in bankruptcy,” the analyst wrote in a note to clients

He then spent the summer upgrading it to a “hold” (only two days later) and then in August said BV might rise to $10-$12. Based on a fair P/BV valuation, that meant a 80% to 100% upside in shares (they have risen 90% since). Still, “Ole Greg” could not slap a “buy rating” on shares. Maybe only stock that can rise >100% in 6 months get a buy?

But, according to their own research report, a “Buy” is:

BUY -For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months.

What? They just could not go from “sell” to “buy” in 8 weeks. Why? Nothing essentially changed with the company. It was just that the first report was so bad, it pinned them to it and rather than make the jump and admit the first one materially flawed, they punted.

So, here we are today and another report comes out: Stifel 2/17/2011 ACAS Report (pdf).

Investment Thesis: We believe ACAS will continue to grow book value through the retention of earnings (meaning no dividend for the next couple of years) and potential appreciation of current investments. If the economy continues to improve we estimate longer-term book value for ACAS over the next 2 years will range from $13-$14, which would imply a $11.70 – $12.60 stock based on the 0.9x current price/book multiple. As a result we believe there is 20-35% upside in the stock from the current price over the next 2 years (10-17% annualized).

They are making the same mistake they made in the summer of 2010. Back then they set their price targets based on the .6X BV valuation the company was then trading at. The flaw is that as the company improves, the discount to BV closes (now at .88X BV). Historically ACAS has traded at 1.3X BV. I think 1X BV is fair until the dividend is restored (it is still below the industry average). That being said even simply taking their BV targets of $13-$14, that means ACAS has 37%- 47% upside in shares, making it a “BUY” in their rankings (unless they feel the S&P will do that).

For the record, I feel their BV #’s are a bit low but I use them not as an endorsement of them but to not be accused of making up #’s to make my point.

If there is a silver lining I guess the fact they think BV will continue to rise at a healthy pace is good…

Why is the “Hold” rating from last summer omitted from the current report?

Source: Stifel's Out With Another American Capital Strategies Report