Top June Financial Service Sector Dogs Are BDCs

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Includes: AINV, ARCC, BGCP, BKCC, EFC, GAIN, HSBC, HTGC, NMFC, OCSL, PNNT, PSEC, TCRD, WDR
by: Fredrik Arnold
Summary

Top ten financial service dogs yield ranged from 10.7% to 17% as of 6/17/16. Thirty showed yield from 5.22%. Tops was PNNT. No real estate dogs were allowed.

Top ten by yield, GAIN, ARCC, NFMC, BKCC, EFC, PSEC, TCRD, FSC, AINV, FSC, and PNNT, mixed down after May, while Dow dogs charged bullishly.

Ten top upsides averaged 20.5%, while net gains averaged 29.5% per analyst one-year targets. Upsides for top thirty dogs averaged 9.05% with 15.87% gains.

Analyst targets forecast one-year net gains ranging from 21.2% to 54.8% for PFLT, HTGC, EFC, GAIN, TCRD, HSBC, ARCC, WDR, FSC, & BGCP.

$5k invested in the lowest priced five of ten top yield financial services sector stocks in June showed 13.71% more net gain than $5k invested in all ten by 2017.

Financial Services SML June Dogs

Yield (dividend / price) results from here verified by Yahoo Finance were calculated as of June 17, 2016 for Small, Mid, & Large cap Financial stocks. Small cap firms were valued at $200M(illion) to $2B(illion); Mid cap firms were worth $2B to $10B; Large caps were valued above $10B. Those yield results led to ten actionable conclusions discussed below.

Fifty Financial Services For The Show

Since late 2011 this report series has applied dog dividend methodology to uncover possible buy opportunities in each of eight major market sectors listed by Yahoo Finance: basic materials (BasMats), consumer goods (ConGo), financials (Fins), healthcare (Heal), industrial goods (IndiGo), services (Svcs), technology (Tec), and utilities (Utes). In the past two years the series expanded to report (1) dividend yield; (2) price upside; (3) net gain results based on analyst 1 yr. target projections.

Now the series is being revised to report on eleven sectors as defined by Morningstar and tracked here: Basic Materials; Communication Services; Consumer Cyclical; Consumer Defensive; Energy; Financial Services; Healthcare; Industrials; Real Estate; Technology; Utilities.

This article was intended to reveal bargain stocks to buy and hold up to one 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 Sorted Financial Stocks by Yield

Top ten financial services sector dogs showing the biggest dividend yields as of market close June 17, 2016 represented three industries: (1) asset management; (2) credit services; (3) specialty finance. Nine of the ten were Business Development Companies [BDCS].

Top financial sector stock by yield, Pennant Park Investment (NASDAQ:PNNT) (1) was listed as the first of eight asset management industry firms. All of these are self-described as BDCs.

The remaining seven asset management [BDC] representatives placed third through fifth, and seventh through tenth: Apollo Investment Corporation (NASDAQ:AINV) [3]; THL Credit Inc. (NASDAQ:TCRD) [4]; Prospect Capital Corporation (NASDAQ:PSEC) [5]; BlackRock Capital (NASDAQ:BKCC) [7]; New Mountain Finance Corporation (NYSE:NMFC) [8]; Ares Capital (NASDAQ:ARCC) [9]; Gladstone Investment (NASDAQ:GAIN) [10]. Again all are BDCs, although Yahoo categorizes NMFC as a conglomerate.

Finally, one more BDC, categorized in the credit service industry, placed second, Fifth Street Finance (FSC) [2].

In sixth place, Ellington Financial LLC (NYSE:EFC) [6] was the lone specialty finance representative, is an advisor and investor in real estate mortgage-backed securities that completed the top ten June financial service pack by yield.

Top Financial Service Dividend vs. Price Results Contrasted The Dow Dogs

Graphs below compared relative strengths of the top ten financial services sector dogs by yield as of market close 6/17/2016 with those of the Dow industrials index. Annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks beside the total single share price of those ten stocks made the data points shown in green for price and blue for dividends.

Actionable Conclusions: (2) Financial Dogs Mixed Down As (3) Dow Dogs Charged

Financial services sector dogs mixed down as dividend and price both fell after May. Dividend from $10k invested as $1k in each of the top ten dogs dropped 5.8% into June while total single share price fell 9.27% for the period, making the mix down.

Bullishly, Dow dogs charged as their dividend fell as their price increased in the post-May period. Projected annual dividend from $10k invested as $1K in each of the top ten Dow dogs dropped 2.37%. At the same time, aggregate single share price rose 5.2% to set the Dow charge.

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 toward its widest of the year.

Actionable Conclusion (4): Dow Dogs Remained Overbought

In July the overhang was $269 or 71%, but it inflated again as IBM (NYSE:IBM) replaced Pfizer (NYSE:PFE) to widen the gap to $331 or 85% in August. September brought some sanity back to the runaway Dow when the gap stood at $279 or 67%. October increases in price by Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) pushed the gap to $334 or 85%.

November changed out McDonald's (NYSE:MCD) for Wal-Mart (NYSE:WMT), and General Electric (NYSE:GE) for Coca-Cola (NYSE:KO). The resulting price over dividend gap went to $303 or 78%. As of December 4 the gap stood at $294 or 75%.

Come January 12, 2016, prices of the ten Dow top dogs fell, and dividends rose, as Boeing (NYSE:BA) replaced General Electric to reduce the overbought gap to $215 or 53%. February moves put the gap at $230 or 55%. March extended the move as high price Procter & Gamble (NYSE:PG) replaced Intel (NASDAQ:INTC) in the ten slot moving the bar to $372 or 95%. April saw higher prices return to XOM and CVX and Boeing returned to the top ten so the price gap went to $392 or 102% before Procter & Gamble dropped out of the top ten in May, to help the gap recede 11% to $349, or 91%. Upward market pressure on the Dow moved June's numbers to $376 or 100%.

This gap between high share price and low dividend per $1k invested defines the Dow over-bought condition. Meaning these are low risk and low opportunity Dow dog stocks. The Dow top ten average price per dollar of annual dividend is now $26.51 in June, which is up 1.3% from $26.16 in May.

Conversely, the financial services dog chart shows them to be much higher risk and higher yield. Furthermore, the financials show greater likely price gains at far higher risk compared to the Dow this month. The financial sector top ten average price per dollar of annual dividend is $8.14, less than one third the Dow price.

Wall Street Wizard Weights

One-year mean target price set by brokerage analysts multiplied by the number of shares in a $1k investment revealed ten stocks showing the highest upside price potential into 2017 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 have usually provided the most accurate mean target price estimates.

Actionable Conclusion: (5) Analysts Asserted 16.3% Average Price Upsides For Ten June Financial Service Dogs

To quantify top dog rankings, analyst price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metrics, analyst target estimates were another tool to dig out bargains.

Actionable Conclusions: Wall St. Wizards Wished (6) A 9.05% Average Upside, & (7) A 15.87% Average 1 yr. Net Gain from Top 30 June Financial Dogs

Financial sector dogs were graphed below to show relative strengths by dividend and price as of June 17, 2016 and those projected by analyst mean price target estimates to the same date in 2017.

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 median target price was used to gauge the stock upside to 2017.

Historic prices and actual dividends paid from $1000 invested in each of the thirty highest yielding stocks and the aggregate single share prices of those thirty stocks divided by 3 created the data points for 2016. Projections based on estimated increases in 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 2017 data points green for price and blue for dividends.

Analyst targets reported by Yahoo! Finance forecast 8.4% less 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 7.8% 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 (8): Analysts Saw 21.19% to 54.77% Net Gains for Ten Financial Services Dividend Dogs As Of June, 2017.

Five of the ten top dividend yielding financial services dogs were verified as being among the ten gainers for the coming year based on analyst 1 year target prices. So this month the dog strategy for the financial services sector as graded by Wall St. wizards was 50% accurate.

Ten probable profit generating trades were revealed by Thompson/First Call in Yahoo Finance for 2017:

BGC Partners (NASDAQ:BGCP) was projected to net $547.72 based on dividends plus a mean target price estimate from two analysts less broker fees. The Beta number showed this estimate subject to volatility 12% more than the market as a whole.

Fifth Street Finance Corp was projected to net $377.09 based on dividends plus mean target price estimates by nine analysts less broker fees. The Beta number showed this estimate subject to volatility 96% less than the market as a whole.

Waddell & Reed Financial (NYSE:WDR) was projected to net $292.99 based on a median target price estimate from eight analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 74% more than the market as a whole.

Ares Capital was projected to net $265.31 based on a median target price estimate from eight analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 38% less than the market as a whole.

HSBC Holdings (NYSE:HSBC) was projected to net $264.11, based on dividends plus mean target price estimates from two analysts less broker fees. The Beta number showed this estimate subject to volatility equal to the market as a whole.

THL Credit was projected to net $262.15 based on dividends plus a mean target price estimate from ten analysts less broker fees. The Beta number showed this estimate subject to volatility 7% more than the market as a whole.

Gladstone Investment Corporation was projected to net $253.83, based on dividend plus mean target price estimates from two analysts less broker fees. The Beta number showed this estimate subject to volatility 28% less than the market as a whole.

Ellington Financial Corporation was projected to net $243.64 based on a median target price estimate from six analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 65% less than the market as a whole.

Hercules Capital (NASDAQ:HTGC) was projected to net $234.32 based on a mean target price estimate from eleven analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 20% less than the market as a whole.

Pennant Park Investment Corp was projected to net $211.90 based on a median target price estimate from three analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 39% less than the market as a whole.

The average net gain in dividend and price was estimated at 29.53% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 19% less than the market as a whole.

Two Financial Service Sector Price Histories Graphically Illustrated Analyst "Contrarian Bias"

Price histories repeat the news shown below above in the year to date graph: the lowest Financial Services "loser", PSEC, showed a higher year to date price trajectory than the analysts upside star stock, BGCP. Upside momentum is substantially missing in the Wall Street Wizard target estimated top dog.

This evidence correlates with Michael O'Higgins "media index" admonition. He advises investors to pay close attention to "magazine covers, news headlines, and ads placed by investment advisors, primarily in Barron's." He concludes that "you can make out like a bandit by acting the opposite way." Apparently analyst target price estimates are contrarian indicators.

Dog Metrics Found More Bargains From Five Small Financial Service Dogs

Ten small, mid, and large cap financial services equities were culled from over 100 choices from here. Yield (dividend / price) results verified by Yahoo Finance did the ranking.

As previously noted, ten top yield financial services sector dogs as of June 17, 2016 represented three industries: (1) asset management; (2) credit services; (3) specialty finance. Business Development Companies comprised nine of the ten.

Actionable Conclusions: (9) Analysts Estimated 5 Lowest Priced of Ten Highest Yield Financial Services Dividend Dogs Will Deliver 25% VS. (10) 21.99% Net Gains by All Ten by June 17, 2017

$5000 invested as $1k in each of the five Lowest priced stocks in the top ten financial services dividend kennel by yield were predicted by analyst 1 year targets to deliver 13.71% more net gain than $5,000 invested as $.5k in each of the ten. The very lowest priced financial dividend dog, Fifth Street Finance , was projected to deliver the best net gain of 37.71%.

Lowest priced five financial services dividend dogs for June 17 were: Fifth Street Finance ; Apollo Investment ; Pennant Park Investment Corp ; Gladstone Investment Corp ; BlackRock Capital , with prices ranging from $4.81 to $7.55.

Higher priced five financial dividend dogs for June 17 were: Prospect Capital Corp ; THL Credit ; New Mountain Finance ; Ares Capital ; Ellington Financial Corporation , whose prices ranged from $7.75 to $17.41.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The same technique, you now see, can also be used to find the more rewarding dogs in the Financial sector.

The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. Its also the work analysts got paid big bucks to do.

A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

Annual Analyst Accuracy

You see below the one year result of ten analyst target estimates for Financial stocks from this article in 2015. These were applied to the "basic method" Michael B. O'Higgins employed for beating the Dow. The key shows: losses in a reddish tint; poor results tinted yellow; gains tinted green; no tint means no difference.

The "basic method" top ten annual analyst accuracy score from early June 2015 was three losses against three poor performing predictions, three gaining, and one indifferent.

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.

The stocks listed above were suggested only as possible reference points for a small, mid, and large cap financial equities dog dividend stock investment research process in mid-February, 2016. These were not recommendations.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article. --Fredrik Arnold

Gains/declines as reported do not factor-in any tax problems resulting from dividend, profit, or return of capital distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

Three of these financial services sector dividend pups are listed as valuable catches! Find them as part of the 43 Dogs of the Week described on my Dividend Dog Catcher premium site. Click here to learn more and subscribe.

A top performing DOTW dog for the first quarter has been named. A second quarterly winner was discovered May 13. For a free copy of both quarterly reports and analysis of the winning Arnold Q1 & Q2 picks, plus a surprise bonus bottom dog report, send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any type to: fredrika120@gmail.com. Remember: E-mail, ticker, team!

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 ycharts.com; dividend.com; finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance.

Disclosure: I am/we are long FSC, INTC, PFE, CSCO, VZ. 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.