July 26, 2012: We track three dozen Business Development Companies ("BDC") religiously every day for our business. We have noted several times over the years that stock prices spike up just before a new equity offering is announced. (Then the stock price drops, but that's another story). Based on a disclosure we read in a 10-K once which discusses this phenomenon, the price movement is due to the investment banks pumping up the stock price by buying into the market to assure the highest possible price for the new stock issue. On thinly traded stocks that's not hard to achieve.
Anyway, we are predicting, based on just such a stock movement, that Fidus Investment Corp (FDUS) a smaller, 1 year old BDC which specializes in mezzanine lending to lower middle market companies, will be shortly announcing a new debt or equity raise (first since the IPO). The Company filed a Preliminary Prospectus just a week ago, so the ground has been prepared. If stock, the price will probably be at $15.0-$15.2, just above both the March 31 NAV and the IPO price. If debt is raised, FDUS will probably be targeting 7 year money at 7.0%.
The Company pays a $1.44 annual dividend, which at $15.0 suggests a 9.6% yield. The 4 analysts covering the stock have a 2013 consensus earnings of $1.83, which suggests the forward multiple would be at 8.2x, which is reasonable in this sector. The future earnings projection also implies the dividend could grow materially in the quarters ahead.
Of course, all data is 4 months old as Fidus has not yet reported second quarter results or given any previews as some BDCs like to do.
We shall now wait and see if we are right or wrong. We made a similar call on Ares Capital last year but nothing happened, so treat this prediction with all due caution.
Disclosure: I am long FDUS.