A Half Dozen Reasons To Strongly Consider This 12% Yielder

 |  About: Fifth Street Finance (FSC)
by: Bret Jensen

In a slow growth environment, I continue to believe Business Development Companies (BDC's) should make up a key piece of an income investor's portfolio. These companies are ideally positioned as long as there is liquidity in the credit markets, the domestic economy still grows albeit at a slow pace and the banks continue to reduce their lending to small and medium size firms as they lower their risk profile.

Fifth Street Finance Corp. (NASDAQ:FSC) - Fifth Street Finance Corporation is a specialty finance company that lends to and invests in small and mid-sized companies, primarily in conjunction with investments by private equity sponsors.

6 reasons should be strongly considered by income investors at under $10 a share:

  • FSC yields 12% and pays out a distribution monthly.
  • It is one of the few BDC's whose debt has an investment grade rating from two of the main rating agencies (Fitch and S&P). This lowers the company's cost of capital.
  • Insiders have been strong buyers of new shares over the last year. The seven analysts that cover the stock have an $11 median price target on the stock. Deutsche Bank initiated FSC as a "Buy" late last year.
  • Analysts expect strong revenue growth for the company over the next couple of years. Predictions call for over 30% sales growth in FY2012 and then increasing over 20% in FY2013.
  • In addition to a huge yield, earnings are expected to show some growth. The company made $1.01 in FY2011 and analysts expect it to earn $1.10 a share in FY2012 and $1.17 in FY2013.
  • The stock has solid technical support at just under these levels (See Chart).

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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FSC over the next 72 hours.