I have owned Prospect Capital (NASDAQ:PSEC) since 2010. During this time I have rarely seen prices as low as the are today. I have collected all my dividends as paid out, and used that dividend to support my small business.
Today, I am participating in this downward pressure as it allows me to benefit materially in the recovery of the share price. Many investors have complained in various forums about total returns and capital appreciation being too low for Prospect. This price decline presents a rare chance to bolster your returns.
What holds us back? We are "afraid". What are we all afraid of? Oddly we are terrified of events that can create tremendous opportunities. Why? Everyone wants to win, to be right, to be the smartest guy in the room. As the stock drops it becomes part of a positive feedback loop. The drop reinforces the negative thoughts and fears that had been buried deep inside during the years proceeding such decline.
More negative articles are posted and many more "I warned you", "I told you so" are cast in the face of the investor. This in our modern day causes further deterioration and more quickly than in the pre Al Gore invented internet.
This drop creates a wonderful opportunity for those interested in monthly income. The most recently reported Net Asset Value was 10.68. Participation in any below net asset value purchase and you will have a much better chance achieving capital appreciation on top of your high yield.
Why did the stock drop?
The stock dropped as sentiment changed. Institutions and individuals have been selling since early March when the stock was trading much higher. They based that decision not on company financials but on it's elimination from the S and P and Russell indexes. This decision was based on the structure of the Business Development Company not the fundamentals. At that time it appeared some funds would keep Prospect as they further disclosed the Acquired Fund Fee expense rules required in financial reporting by the SEC. The short interest went up and what were once supporters of the company and it's shares began to jump off the boat.
Earnings were just shy of dividend coverage which was close to expectations. You can read them here: prospectstreet.com.
The elephant in the room:
The failing acquisition of Nicholas Financial and the subsequent SEC request for consolidation of certain holding companies on the company financials. Management has stated this will not change cash flow or its ability to pay it's dividend.
So now you have an issue that reinforces the fear of loss and you see many more comparisons to World com and Enron.
The Company has reassured the public in its 10q and public press releases that there would be "no negative effect to shareholders" if a restatement were to occur. I also have been up many nights reading everything I can about the specific accounting issue. I do not see any impact on the dividend. Incentive fees would drop, yet another positive outcome if a restatement were to happen.
I am going to buy here and write a follow up once the issue is behind Prospect. Lets see how we do.
Disclosure: I am long PSEC.