BDC Buzz Begins 2016 Purchases

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Includes: AINV, ARCC, BKCC, FDUS, FSC, FSFR, GARS, GBDC, GLAD, GSBD, HRZN, HTGC, KCAP, MAIN, MCC, NEWT, NMFC, PFLT, PNNT, PSEC, SLRC, SUNS, TCPC, TICC, TPVG, TSLX
by: BDC Buzz

Summary

I have been actively purchasing select BDCs.

The average BDC is still yielding over 13% in dividends and trading at a 22% discount to book value.

This should be seen as ridiculous and an opportunity for investors as even a worst case scenario is already priced in for many of these companies.

BDCs will begin to report Q4 results in less than two weeks that could drive an upcoming rally.

As I have mentioned to my offline subscribers, I have begun actively purchasing select business development companies ("BDCs").

The following articles discuss my approach to investing in BDCs as well as why I believe higher quality companies will rebound in February, as they begin to report calendar Q4 2015 results:

The following chart shows the average BDC performance including recent lows that are tightly correlated to lower relative strength index ("RSI") and higher S&P 500 Volatility Index ("VIX"). On January 20, 2016, I purchased additional shares in many BDCs as the RSI for most BDCs hit a 12-month low and the VIX was over 32 and well above 20, which is usually when I make purchases.

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Relative High-Yield Performance:

The last 12-months has been tough on higher yield investments including mREITs, MLPs, bond funds and BDCs, for many reasons including higher yield expectations from investors potentially from interest rate and credit cycle concerns, oil prices, and general market volatility.

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BDCs have performed relatively better than the others for a few reasons as discussed in the articles linked above.

BDC Performance 2015 & 2016 YTD

The following table shows that stock price performance for each BDC for 2015 and 2016 year-to-date. I have also identified which companies are trading near or above net asset value ("NAV") per share or at a 35% or larger discount.

Novice and uniformed investors usually make the typical mistake of buying BDCs with lower relative multiples and higher relative yields. Unfortunately this philosophy is also supported most contributors on Seeking Alpha that continually advise investors to purchase or sell BDCs based on relative multiples of NAV. This advice has led investors down the wrong path in 2014, 2015 and so far in 2016, with large and continuing losses in BDCs such as Fifth Street Finance (NASDAQ:FSC), Fifth Street Senior Floating Rate (NASDAQ:FSFR), Medley Capital (NYSE:MCC), TICC Capital (NASDAQ:TICC) and Prospect Capital (NASDAQ:PSEC) while keeping them from purchasing higher quality BDCs. Investors and fellow contributors need to understand that we have been and will continue to see bifurcation between higher and lower quality companies. This means that they are valued on overall quality as compared to opaque and sometimes volatile NAV values.

Obviously the other big losers are still the ones with higher oil exposure such as PennantPark Investment (NASDAQ:PNNT), Apollo Investment (NASDAQ:AINV) and Gladstone Capital (NASDAQ:GLAD).

2016 YTD Performance

The S&P 500 is down 6.7% for 2016 and BDCs such as TPG Specialty Lending (NYSE:TSLX), Main Street Capital (NYSE:MAIN), Goldman Sachs BDC (NYSE:GSBD), Ares Capital (NASDAQ:ARCC), TCP Capital (NASDAQ:TCPC),PennantPark Floating Rate Capital (NASDAQ:PFLT), Golub Capital BDC(NASDAQ:GBDC), Fidus Investment (NASDAQ:FDUS), Solar Capital (NASDAQ:SLRC),Garrison Capital (NASDAQ:GARS), Solar Senior Capital (NASDAQ:SUNS) and AINV are currently outperforming the overall market, even before including dividends. BlackRock Capital Investment (NASDAQ:BKCC) is about even with the market for 2016 but outperformed the other BDCs in 2015.

This biggest loser for 2016 so far is Newtek Business Services(NASDAQ:NEWT) followed by collateralized loan obligation ("CLO") heavy BDCs such as KCAP Financial (NASDAQ:KCAP) and TICC that are all down over 20% during the first three weeks of the year.

Other BDCs that underperforming, are the ones that lend to VC-backed tech companies including Hercules Technology Growth Capital (NYSE:HTGC), Horizon Technology Finance (NASDAQ:HRZN) andTriplePoint Venture Growth (NYSE:TPVG). There could be many reasons for this but likely due to lower expected market values that could lead to less IPOs or merger/acquisition activity for portfolio companies.

Will BDCs continue to rally and which ones should I be buying?

As mentioned in the articles linked above, I believe that when BDCsreport results in less than two weeks, many of them will beat or match earnings estimates with strong or adequate dividend coverage. This has already been the case with the announced preliminary results for TCPC, FSC and New Mountain Finance(NYSE:NMFC) that I will discuss in future articles. Strong earnings results could result in a rally for BDC pricing.

BDCs that have carefully built their portfolios and balance sheets, to withstand various credit and economic cycles, will likely do much better during rising default and/or interest rates. Many of these BDCs are inappropriately priced which is why I believe we will see higher valuations for companies that are less likely to experience upcoming credit issues that could drive NAV declines and dividend coverage issues in 2016. If you are interested in more information on BDCs including my recent purchases and current positions, individual dividend coverage potential, rankings (risk, return, pricing, dividend potential), target pricing charts and valuations, and suggest BDC portfolios, please see my "BDC Research Page" and for information on specific BDC pricing, total returns, operating expenses and dividend coverage, please visit my "BDC Pages".

Personal note: I have updated my positions to reflect changes in my holdings, but please keep in mind that some of the positions are very small and mostly for research purposes.

Disclosure: I am/we are long ABDC, AINV, ARCC, BKCC, FDUS, FSC, FSFR, FSIC, GAIN, GARS, GBDC, GLAD, GSBD, HTGC, MAIN, MCC, MRCC, NMFC, PFLT, PNNT, PSEC, TCAP, TCPC, TICC, TPVG, TSLX.

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.