BDC COMMON STOCKS

Week 19

Summer Is Here Early

The markets are hot, hot, hot.

The Dow saw a weekly gain of 2.2%, its best performance since December, as the blue-chip gauge advanced for a fourth straight week. The S&P 500 climbed 1.9% for the week, while the technology-heavy Nasdaq Composite saw a 1.1% weekly rise.

Wall Street Journal – May 10, 2024

All the major indices are posting strong returns in 2024 both on a price and total return basis.

For example, the S&P 500 is up 9.5% on price alone and 10.0% when dividends are considered, and we’re not even at mid-year yet…

Us Too

The BDC sector has kept up with the major indices, both this week and over the 19 weeks since the end of 2023.

The S&P BDC Index – calculated on a price only basis – moved up 1.1% over the last 5 days and 1.7% on a total return.

More importantly – and impressively – the S&P BDC Index has moved up 6.55% in price alone and 9.96% when distributions are factored in.

On that last metric, the BDC sector is running neck-and-neck with the S&P 500 19 weeks into this year.

Looking Closer

When we drill down into the performance metrics of the 42 public BDCs we track, there can be no doubt that most investors are smiling at this point.

29 BDCs saw their price increase this week and 13 drop.

Amongst those BDCs in the black, an impressive 16 saw their price increase by 3.0% or more.

Relief

Many of these BDCs caught a wave after releasing their IQ 2024 results as some investors had stayed away, not certain that all would be alright.

Also going on – but hard to pin down – is that desperate search for value at a time when every BDC stock seems to be expensive.

Under-Loved

However, we’re not yet at that phase in many stock rallies when investors will buy ANYTHING.

Year-to-date, 13 BDC stocks are trading below their year-end 2023 price.

We’d say at this stage in the year, there are a handful of BDC stocks that remain out of favor, going by price performance in these latest 19 weeks.

Going Backwards

8 BDCs are down (7%) or more in price this year, led by OFS Capital (OFS), off (18%).

As is usually the case in these situations, the blame for the price drop can be placed on credit performance.

We reviewed the BDC’s credit status in an article on Friday, where we downgraded the BDC’s performance to BELOW NORMAL. Here’s an extract from our conclusion:

This credit deterioration has been happening for some time. A glance at the ultimate thermometer of BDC performance – net book value per share (NAVPS) shows that OFS has seen a (27%) decline since the end of 2021. This quarter’s (8%) NAVPS decline was the final nail. In the last 2 full fiscal years, OFS has booked net realized losses of ($46mn). That’s a lot when your total capital at the end of 2021 was $204mn…

You’ve Heard This Before

Also out of favor – trading just (4%) off its 52-week low – is TriplePoint Venture Growth (TPVG), which has dropped (15.1%) this year and more than (50%) since reaching a high in November 2021.

Credit problems are the cause of its price decline as well. In the past two years, TPVG’s Net Asset Value Pewr Share has dropped (24%) and (36%) in the past 3 years.

It’s a similar story for Saratoga Investment (SAR); Horizon Technology Finance (HRZN); Prospect Capital (PSEC); BlackRock TCP Capital (TCPC); Investcorp Credit Management ((ICMB) and Runway Growth Finance (RWAY).

Getting Out

That last name did itself no favors when an insider group announced on Thursday their intention to sell a big block of shares owned.

Not terribly surprisingly, RWAY’s stock price was hammered, dropping (10.7%) on the week – the worst price performance by any BDC.

Its shareholders must be hoping that the price will recover going forward, as occurred in November 2023 after a similar sale was announced.

The stock price dropped (8%) in a few days but returned – and then exceeded – its pre-announcement price in less than 3 months.

Good Value ?

By the way, for anyone of you “bargain hunters” RWAY currently trades at 6.5x its analyst-estimated 2024 net investment income per share and is trading at a sharp discount to net book value per share.

Going by the BDC Best Ideas projection of a $1.74 total payout in 2024, RWAY is yielding 15.0% – the best of any BDC.

Opportunity or illusion? We’ll get to that shortly in BDC Best Ideas.

Looking Forward

Can this BDC rally continue?

After all, both the sector and the individual prices of many BDCs are reaching record levels when compared against 52 week highs and even all-time levels.

This week, 13 BDCs posted new 52-week price records, the most since we started keeping track of this metrics in August 2021.

We ended the week with 23 BDCs within 5% of their 52-week highs – the best such performance since late 2021.

Moreover, 21 BDCs are trading at or above their net book value per share.

This is not an all-time record, but you have to look back to mid-2021 to find a higher number and only for one week.

Breaking Through

This week, BIZD – the only BDC exchange traded fund and a resource we look at from time to time – reached a 52-week high intra-day on Friday at $17.08 a share.

BIZD now needs to travel only about 4% higher to reach its top price levels of 2022 – just before the Fed started to raise rates and everyone figured a recession was coming.

That faulty assumption caused BIZD to drop as much as (24%) in roughly 6 months.

BIZD has further to go to establish a new all-time price record in its 11 year history: 27% to match the level of 2013 and 13% to equal the peak of 2017.

Bull Case

We don’t rule out that possibility given that current dividend levels are higher than in any of the prior periods in the history of BIZD.

Yes, we might have reached “peak earnings” where BDCs are concerned – as touted by Sixth Street Specialty (TSLX) and other managers – but we might not.

All it would take for the sector to reach new earnings heights would be a rate hike or two from the Fed.

Even without that outlier of a development, one could envisage BDC earnings and distributions remaining at their currently elevated levels for a year or more if inflation puffs out its chest and offers up a fight in the months ahead.

Bear-ish Case

At the same time, one could also read into the latest employment and consumer confidence numbers a signal that a weaker economy lies ahead, resulting in both more credit troubles and – possibly – lower interest rates should the Fed turn on its heel.

In that case, the BDC sector will face the double whammy of panicky investors bailing out to preserve recent gains and to avoid receiving a lower payout before too long.

Once again – and whether one likes it or not – the future direction of BDC prices will have much more to do with which way the zeitgeist is pointing than anything else.

Up Then Down

We could even get both these extreme alternatives in a short period – a further rally followed by a precipitous price descent if inflation, GDP and interest rates line up in certain ways.

In short, we are in a very exciting – but dangerous period – especially for investors seeking to time the market.

We’d suggest to those investors: keep your eyes peeled and check back with us regularly.