Ace BDCs Score 11-15% Yield; 12-36% Upside; 23-48% Net Gain In December

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Includes: CPTA, FDUS, GECC, HCAP, KCAP, MCC, OCSL, OFS, OXLC, OXSQ, PSEC, SCM, TCAP, WHF
by: Fredrik Arnold

Summary

After November Business Development Companies (BDCs) populated three lists:1. By yield (FULL 15.31% Tops) 2. By upside (MCC 36.36% Tops) 3. By net gains (FDUS 43% took second).

Actionable conclusions:1. Ten BDCs showed 24% average upsides; 2. BDCs bearish but Dow bullish by yield; 3. Top 30 BDCs averaged 17.4% gain; 4. Top 10 BDCs averaged 31.4% net gains.

Analysts projected 23.2% to 48.4% 1 yr. net gains for MCC, FDUS, PSEC, WHF, TCAP, FSC, OFS, SCM, TICC, & CPTA.

Consider these lists and conclusions as possible starting points for your December Business Development Company dog investment research.

Yield (dividend / price) results from Yahoo Finance as of market closing prices December 4 for Business Development Company Stocks listed here were compared with analyst 1-yr target projections to reveal four actionable conclusions discussed below.

After June 2014, when the Acquired Fund Fees and Expenses (AFFE) proviso of the SEC prompted both Russell and S&P 500 to remove representatives of these 40 BDC dogs from their primary equity indices, it became appropriate to track BDC puppy progress as a pack. This is the third such progress report.

Wall Street Wizard Weights

One-year mean target price set by brokerage analysts multiplied by the number of shares in a $1k investment were used to compare ten stocks showing the highest upside price potential into 2015 out of 30 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts were optimal for a valid mean target price estimate.

Actionable Conclusion (1) Ten December BDC Dividend Dogs Chased 12.2% to 36.36% Upsides

Forty For the Money

Since late 2011, a series of Arnold reports showed results of dog dividend methodology used to uncover possible buy opportunities in each of eight major market sectors listed by Yahoo Finance. This article was written to respond to recent reader suggestions for a dividend dog analysis of the Business Development Company industry within the financials (Fins) sector.

This article was written to reveal bargain stocks to buy and hold from December to June or, perhaps, up to one full year. See Dow 30 article for explanation of the term "dogs" for stocks reported based on Michael B. O'Higgins book "Beating The Dow" (HarperCollins, 1991), now named Dogs of the Dow. O'Higgins system works to find bargains in any collection of dividend paying stocks. Utilizing analyst price upside estimates expanded the stock universe to include popular growth equities, as desired.

Dog Metrics Measured BDC Stocks by Yield

Top ten business development company dogs showing the biggest dividend yields as of December 4 represented companies looking to invest growth capital of $3m to $350m in profitable small to middle market private businesses with revenues over $10 million operating in lucrative niche industries. Top BDC industry stock by yield, Full Circle Capital (FULL) invests growth capital of $3m to $10m.

Three of the top ten BDC dogs by yield did not disclose their investment targets. Companies placing second, fifth, and seventh were so inclined: Prospect Capital (NASDAQ:PSEC) [2]; TICC Capital (TICC) [5]; Fifth Street Finance (FSC) [7].

The other six revealed their investment targets and placed third, fourth, sixth, and eighth through tenth: Oxford Lane Capital (NASDAQ:OXLC) [3] invests in corporate Collateralized Loan Obligation [CLO] instruments; Medley Capital (NYSE:MCC) $10/50m [4]; KCAP Financial (NASDAQ:KCAP) [6] was another CLO investor; WhiteHorse Finance (WHF)$50/350m [8]; Harvest Capital Credit (NASDAQ:HCAP)$10/100m [9]; OFS Capital (NASDAQ:OFS) $5/50m [10]. These complete the top ten December BDC dog list by yield.

BDC Yield Leader Dividend vs. Price Results Compared to Dow Index Dogs

Graphs below compared relative strengths of the top ten BDC industry dogs by yield as of market close 12/4/2014 with those of the Dow industrials index. Annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks along with the total single share price of those ten stocks made the data points shown in green for price and blue for dividends.

Actionable Conclusion (2): BDC Pups Retreated As Dow Dogs Charged

The BDC collection of dividend payers continued to be bearish. Since early November, single share price fell 1.7% and aggregate dividend from $10k invested as $1k in each of the top ten BDC dogs ascended at a rate of 2.3%.

Dow dogs sent a very bullish sign as projected annual dividend from $10k invested as $1K in each of the top ten fell 1.1% since November. At the same time, aggregate single share price jumped up 28% (powered by IBM's $160 price replacing the $40 price of KO in the top ten) to confirm the bullish signal.

The Dow dogs overbought condition (in which aggregate single share price of the ten exceeded projected annual dividend from $1k invested in each of the ten) expanded. The overhang of $132 or 35% in January/February, widened to $180 or 49% for March/April, expanded to $193 or 53% for May/June, grew to $207 or 56% for July/August, fell to $200 or 54% for September/October, fell again to $192 or 51% for November, but expanded to the year's widest of $356 or 96% in December.

To quantify top dog rankings, analyst mean price target estimates provide a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metric, analyst mean price target estimates is another tool used to dig out bargains. Projected gains based on analyst targets provide a here and now equivalent of waiting a year to find out what will happen in the market. Analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

Actionable Conclusion (3): Wall Street Wizards Wanted A 17.35% Net Gain from Top 30 BDC Dogs Come December 2015

Top twenty dogs from the Business Development Company industry were graphed below to show December 4, 2014 and those projected by analyst mean price target estimates to the same date in 2015.

A hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter the analyst mean target price was used to gauge the stock price upsides and net gains including dividends less broker fees as of 2015.

Historic prices and actual dividends paid from $30,000 invested as $1k in each of the highest yielding stocks and the aggregate single share prices of those twenty stocks divided by 3 created data points for 2014. Projections based on estimated dividend amounts from $1000 invested in the thirty highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 3 created the 2015 data points green for price and blue for dividend.

Yahoo projected a 9.6% lower dividend from $10K invested as $1k in ten dogs in this group while aggregate single share price for those ten was projected to increase by 11.7% in the coming year.

The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts was considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied (n/a).

A beta (risk) ranking for each stock was provided in the far right column of the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stocks movement opposite of market direction.

Actionable Conclusion (4): Analysts Alleged Ten Top BDC Net Gains of 23.16% to 48.38% by December 2015

Six of the ten top dividend yielding BDC dogs were verified as being among the ten gainers for the coming year based on analyst 1 year target prices. So this period the dog strategy for the BDC industry as graded by Wall St. wizards was 60% accurate.

Ten probable profit generating trades were revealed by Thomson/First Call in Yahoo Finance for 2015:

Medley Capital Corporation was projected to net $483.79 based on dividends plus mean target price estimate from ten analysts less broker fees. The Beta number showed this estimate subject to volatility 60% less than the market as a whole.

Fidus Investment Corp (NASDAQ:FDUS) was projected to net $430.13 based on estimates from three analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 36% less than the market as a whole.

Prospect Capital Corporation was projected to net $395.30 based on dividends plus a mean target price estimate from six analysts less broker fees. The Beta number showed this estimate subject to volatility 17% less than the market as a whole.

WhiteHorse Finance was projected to net $310.63 based on a mean target price estimate from seven analysts combined with projected annual dividend less broker fees. A Beta number was not available for WHF.

Triangle Capital (NYSE:TCAP) was projected to net $284.69, based on mean target price estimates from six analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 45% less than the market as a whole.

Fifth Street Finance was projected to net $262.05 based on estimates from nine analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 32% less than the market as a whole.

OFS Capital was projected to net $261.10 based on dividend plus a mean target price estimate from two analysts less broker fees. A Beta number was not available for OFS.

Stellus Capital Investment (NYSE:SCM) was projected to net $242.04 based on dividends plus the mean of annual price estimates from three analysts less broker fees. The Beta number showed this estimate subject to volatility 97% less than the market as a whole.

TICC Capital was projected to net $235.67, based on dividends plus mean target price estimate from three analysts less broker fees. The Beta number showed this estimate subject to volatility 26% less than the market as a whole.

Capitala Finance Corp. (NASDAQ:CPTA) was projected to net $231.61 based on dividends plus the mean of annual price estimates from six analysts less broker fees. A Beta number was not available for CPTA.

Average net gain in dividend and price was 31.37% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 52% less than the market as a whole.

The net gain estimates above did not factor-in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

Stocks listed above were suggested only as possible starting points for your index dog dividend stock purchase research process. These were not recommendations.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from www.finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance.

Disclosure: The author is long FSC, CSCO, GE, PFE, T, VZ.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.