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Stock Watch: January 5, 2017

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There is very little BDC news for a change as the Daily News Table will attest – a routine monthly dividend announcement for Solar Senior Capital (SUNS) and a new financing by Hercules Technology (HTGC) – but the BDC Reporter has been watching the price action on the 46 BDCs we track.  We don’t write a full length article every time a stock hits a new low or a new high or we’d never do anything else. However, we wanted to alert readers to the movements of three very different BDCs, which might be telling us something about market sentiment. Or not. Readers will have to decide for themselves.


STOCK WATCH

The three BDCs on our Stock Watch have all hit 52 Week Lows, either today or the day before. First was TCP Capital (TCPC), which dropped to $15.10 on January 4, a (14%) drop from the 52 Week High. The stock has been in constant decline since March 2017. At the current level, TCPC is still priced slightly above book value per share of $14.92 and yields 9.5%. Next was Fidus Investment (FDUS), which has also been on a long journey downward in price since April 19, 2017. From the highest to the lowest level in the last year, FDUS has dropped (18%). Finally, Golub Capital (GBDC) reached its 52 week nadir today too, hitting $17.80. The 52 Week High was $20.50 a share, so GBDC has dropped (13%). GBDC peaked on May 5th 2017 and has been sliding ever since.

As the chart below shows, the trend in these three stocks decline largely mirrors what has been occurring to the BDC sector generally over the past year. GBDC has not dropped as much as the other two, but the basic direction is the same.

Commonality

What these 3 BDC companies have in common is that they have all performed very well in recent years. In fact, since going public all three BDCs have maintained or increased their distribution level. GBDC came on the scene in 2011, FDUS in 2011 and TCPC in 2012. By the BDC Reporter’s lights – and judging by the BDCs yields – by the market’s estimation as well, the dividend payouts of these 3 funds should remain unchanged in the year ahead, or even increase. See the Dividend Outlook Table.

Credit quality has been – and remains- excellent at the three BDCs. Between them – and not counting loans in off balance sheet joint ventures- these funds have nearly 350 companies in portfolio, of which only 1% are on non accrual. What few non-performing loans they have have been essentially written down to virtually zero. We’ve also had a peek at the portfolios and not found any material jump in Watch List loans which may cause trouble in quarters ahead.

Yet, all 3 BDCs are headed down.

Strategic Retreat

Investors have been counting on a January effect – with new allocations of capital by individual and institutional investors into BDC investments. That may yet happen, but besides a little boost on January 2, there has been so sign of heightened investor enthusiasm. In fact, we’ve heard that one of the investment banks that has traditionally followed the BDC Sector – Baird – is pulling out. Here’s what the firm said:

We are discontinuing coverage of the BDC sector due to a reallocation of analyst

resources. Our final ratings were Neutral for ABDC, FDUS, GARS, MAIN, MRCC, NMFC,

OFS, PNNT, SCM, and WHF and Outperform for BANX, CSWC, and TCAP. Investors should

no longer rely on our prior recommendations or estimates when making future investment

decisions.

Quoting Ourselves

The BDC Reporter has been tracking what happens in the BDC Sector every week in the Market Recap. Those of you who read us frequently will know that we’ve not been optimistic about BDC price trends since the spring.

In our most recent edition, the BDC Reporter stuck it’s neck out and offered this prediction for 2018:

Our View

What we have done is look down the list of the 46 names that we’ve covered every step of the way all year and asked ourselves how many seem to be headed in a positive direction and how many not in terms of fundamentals.

We count 24 in the thumbs up category and 22 thumbs down. 

Hardly the ingredients for a Major Rally or Worst Year Ever.

More likely – barring an unexpected Recession or War with X or Some Sort Of Financial Crisis – the BDC Sector is most likely – in our humble opinion – to continue to shift downwards in fits and starts. 

This time next year will BDCS be below $19.00 – a price that would obviate any dividends received on a Total Return basis ? We think so.

Context

That would still be higher than the $18.47 price at the BDCS All Time Low in February 2016 when investors thought all the markets were headed for a fall, but hardly anything to look forward to.

Till then, we may get some short term upward boosts in the year ahead.

In the long run, though, prices and fundamentals synchronize.

Choice

As was the case in 2017 which BDCs you’ve invested – and just as importantly – which you’ve avoided are likely to determine if 2018 will be a Good Year or not.

Just Buying The Sector may not be enough.

Canary In The Coalmine

The continuing price drop of three of the best performing BDCs appears to confirm our suspicion – also mentioned in a prior article – that there has been a major sentiment shift in the BDC Sector.

When the Better Names are selling off, investors should pay attention.

Good News ?

Depending on your outlook, this slump in prices amongst the Better Names is an early warning signal of further troubles ahead that might embroil BDCs of all stripes.

Or, if you’re more optimistic, the beginning of an opportunity to buy quality names at a decent price after nearly two years of being expensive.

We know that our own estimate of the potential 5 year return – a projection we make for every BDC and continually update – is improving.

Two of the three BDCs mentioned in this article are projected to earn a Total Return in excess of 10% per annum.

Looking at all 46, we have identified  8 BDCs (including the two referenced above) whose projected return is in the annual double digit range.

Back in the spring of 2017, there was no BDC which we expected that kind of return from.

This does not mean we’re advocating anybody open their cheque books.

There’s no reason to believe we are yet at some turning point, and good quality stocks may yet be available at even lower prices.


OUR INVESTMENT APPROACH

We did initiate a small position in TCPC on November 21, 2017 at $16.01, and have added to our stake at $15.32 on January 4, 2018.

We have no position in GBDC, which still does not meet our minimum earnings criteria, even at its 52 Week Low !

We sold out of sizeable FDUS positions a few weeks ago – anticipating that the price slump would continue and planning to buy back in when the all-clear sounded. 

 

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