"Reshuffling" Buys in BDCs

06/24/2014 7:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

We are watching like a hawk for any favorite stocks selling at particularly attractive prices; right now, there are good buys among the Business Development Companies (BDCs), explains Adrian Day, editor of The Global Analyst.

BDCs have been hurt by their expulsion from popular indices. Russell will remove all BDCs from their various indices as of the June 27 reshuffle. This has been well telegraphed, so there has already been significant selling ahead of the deadline.

Index huggers, however, will have to sell at the end of June; they have no choice. It is impossible to know how much further the stocks may then fall, or whether the buying from non-index trackers-attracted to the bargains-will overwhelm the selling.

We like Gladstone Capital (GLAD) and Gladstone Investment (GAIN). Both Gladstone companies have stepped up their investments in recent months after a rather dry spell.

Gladstone Capital focuses on debt, including senior debt, whereas Investment buys subordinate debt and equity, often in buyouts.

Gladstone Investment's portfolio companies tend to be smaller, though they often own a larger amount of each company. Both have low leverage, and, in both cases, the dividend is full covered by net investment income.

Gladstone Capital has moved up in the last several weeks and sports a current yield of 8.5%. We would continue to hold. But, for buying now, we would add to Gladstone Investment, whose stock price has declined (nearly $1 since the beginning of April) and carries the higher yield.

GAIN has just completed the best (fiscal) year of operating performance as well the highest amount of originations in its history.

New investment income has outpaced distributions for the past four quarters, and it has a meaningful carryfoward (of about 15 cents per share), after raising the dividend and paying a special bonus dividend last year.

I am not expecting another dividend boost this coming year, but the carryforward supports the dividend payment, and could lead to another bonus dividend later this year. Volatility is our friend; use it!

These stocks, like BDCs in general, tend to be fairly volatile, but within a narrow band. GAIN has swung from highs of $8.40 to lows under $7.60 twice so far this year. It is now near the low end of this range, where you want to be buying.

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