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Gladstone Investment: Analyst Raises To Outperform

BDCs:
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Gladstone Investment (GAIN) has been “initiated at Outperform” by Wedbush Securities, and as reported by Benzinga, which provides just the headline. The price target is $10.0. The BDC News Of The Day dips into its archives and looks at some charts to assess the call, made shortly after GAIN raised new capital early in May:

STOCK PRICE DISCUSSION

GAIN’s recent equity offering at priced at $9.38, only marginally off the oft manipulated high of $9.62 achieved just before. See the chart.  (Ask yourself: are these investment bankers just that good at timing their offerings just right at a high point or is there something else going on in advance of those price jumps in advance of a secondary ?)

Since then the stock price has not gone anywhere, closing Tuesday June 13 at $9.22.

NOT SO BOLD

A $10 target by Wedbush does not represent much of a premium over either the latest price (8%) or the recent secondary (4%). The price is roughly in line with GAIN’s latest NAV of $9.95.

Even then, investors thinking of heeding the investment bank’s advice will need to wonder if GAIN has much further to go after rising from $5.61 in early 2016 to its current level. That’s a 64% move that’s already occurred.

BOTH SIDES NOW

The BDC Reporter undertook a “deep dive” into GAIN’s portfolio as of December 2016 in a long analysis on April 26, 2017. The main conclusion is that GAIN’s strategy of investing in both the debt and equity of lower middle market companies is on the ascendant after years of going the other way. BUT, as with any strategy involving investments in small, privately held companies, there is a great deal of potential volatility built-in. Where GAIN is concerned, as the article shows, there are several positive investments that could increase in value and boost that Net Asset Value, but there are also more than could head in the opposite direction. Market conditions have been very favorable for anyone owning even minority stakes in operating companies and GAIN has taken advantage by recognizing some major gains.  Will that trend continue and has the low hanging fruit already been picked ?

INCOME INVESTMENT

In either case, the bulk of a long term investor’s return is likely to come from ordinary income distributions rather than distributed capital gains so what happens to Net Investment Income is more important than what NAV goes to, either up or down. At the current price, GAIN is trading at an already high 12.5x recurring earnings. The BDC has been earnings more or less the same $0.74 per annum  in Net Investment Income Per Share for years and that’s not likely to change. With a good portion of capital tied up in non-income producing equity; all the pressures on yield that are occurring to lenders across the middle market spectrum and a relatively rich Management and Incentive Fee structure a sudden and sustained upward boost to earnings or the distribution seems unlikely.

Investors buying in today and aiming for that $10 target price will be getting a 8.1% yield and – as discussed above – an 8% potential upside.

Good enough ?

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