Why Shorting Allied Capital is a Losing Proposition

Allied Capital (ALD) describes itself as "one of the nation's leading business development companies" with over $4 billion in assets. The company provides equity and debt financing to private middle market companies.

For the last five years, Greenlight Capital, a hedge fund has been shorting Allied Capitals stock and launching numerous allegations against the company (some ludicrous some not) in hopes of bringing down the share price of the company. Since shorting ALD, Greenlight Capital has taken a beating. The share price of the stock has risen more than 50% and has paid a hefty dividend. The average yield on the stock, since the inception of Greenlight Capital's crusade against Allied Capital, has averaged north of 7%.

The main allegation made against Allied Capital by David Einhorn (the manager of Greenlight Capital) is that the company does not properly value its portfolio of investments correctly. This accusation is so blatantly wrong, however, that even the CEO of Allied Capital's main competitor, American Capital Strategies (ACAS) (for disclosure purposes, I own shares in this company and am very bullish on its prospects) has stated that Allied Capital's method of valuing its investments is not "aggressive" and is typical of private equity firms.

Given the prospects for growth in Allied Capital's share price when Greenlight Capital finally gives up what Fortune Magazine has termed a blood feud and closes its short position, this could be worthwhile opportunity. As for an update on Allied Capital, the company just reported excellent numbers and raised its quarterly dividend by 1.6%. While that may not sound like much, consider this last increase in the context that it is the fourth dividend increase in a row since December of 2005.

ALD 1-yr chart