BDC Common Stocks Market Recap: Week Ended April 16, 2021

WEEK FIFTEEN

On Notice

If you’ve not been paying attention to the direction of BDC common stock prices in the past few months, now is the time to do so.

Once again the S&P BDC Index – on a price basis – closed the week at a new record 2021 YTD, 1 year and 3 year high, and only slightly off the 5 year and 10 year summits.

More importantly, the “total return” S&P BDC index reached – once again – an all-time high.

Supporting Evidence

That’s not all: a large number of individual BDCs reached new 52 week highs this week.

At week’s end, 33 BDCs were within 5% of their 52 week highs and 40 within 10%.

Besties

Even more impressively, there were 8 BDCs who have reached 5 year price highs.

Here are the tickers for anyone interested: ARCC, CSWC, CCAP, GLAD, HTGC, HRZN, NEWT and WHF.

(We’re including CCAP from its recent launch as a public company).

Up There

Like the week before there are 17 BDCs trading over net book value and nobody is trading anywhere near their 52 week lows.

Making Some Calculations

BDCZ – the UBS Exchange Traded Note that owns most of the sector’s stocks – paid a $0.379 quarterly dividend this week, which annualizes to $1.516.

Using the recent high for BDCZ, the BDC sector can be said to be trading at a 12.9x multiple of the payout, or a dividend yield of 7.8%.

By way of comparison, back in April 2020, the dividend was $0.447, or 18% higher.

However, BDCZ traded at a pre-pandemic high of $20.543 at the time, only 5% over its 2021  high, and giving an implied multiple of 11.5x.

More..

Seeking Alpha data tells us that 42 of 43 BDCs are trading up in 2021 and 41 over a 1 year period.

All these numbers and charts – in a week where the S&P “total return” BDC Index was up 0.5% – to illustrate that the sector is running very hot by most any standard.

We are now in the sixth month of the current rally that began in Halloween, but also more than a year away from the price depths reached in the early days of the pandemic.

Rare But Not Unique

There have been longer upward movements in BDC sector prices, although punctuated with mini-pullbacks along the way to test investors resolve.

We remember the August 2011 to November 2013 period, which began as the European financial crisis resolved itself.

This upward surge – though shorter – has been steeper, with most BDCs starting in March-April 2020 at their 5 year or all time lows.

Now we see that many BDCs have managed to trade at both their 5 year low point and high point within the space of a few months.

Breath Taking

This is both exciting and dangerous for BDC investors because the market – as the saying goes – is “priced for perfection” just as we reach the outskirts of IQ 2021 earnings season.

The first two BDCs to report are Horizon Technology Finance (HRZN) and Ares Capital (ARCC).

Coincidentally or not, both BDC’s prices have reached stratospheric levels of late.

In Great Demand

HRZN, which ended 2020 at $13.24, reached an all-time high of $17.56 on Friday : a 33% increase.

Note that in recent weeks the analyst consensus for HRZN’s 2021 earnings has not been growing. Rather the opposite: falling from $1.27 to $1.22.

(That implies a forward Price To Earnings (“PE Ratio”) of 14.4x for a BDC with only $352mn in portfolio assets whose 52 week low was $8.36).

Nor are analysts even very bullish about the upcoming quarterly performance, projecting only $0.28 of Net Investment Income Per Share (NIIPS), presumably due to the cost of redeeming the BDC’s Baby Bond.

For the record, HRZN’s dividend – paid monthly – adds up to $0.30 per quarter.

Highest

ARCC also peaked on Friday at a record high of $19.63.

Since the beginning of the year ARCC has jumped 16%.

The consensus NIIPS is $1.72 for 2021, indicating that the forward PE Ratio is 11.4x.

That may not seem so high by comparison with HRZN, but for ARCC that’s about as high a PE Ratio as we’ve seen over its history.

Nervous Making

The BDC Reporter’s track record in calling a BDC market top is not great, so we’ll avoid that trap this time.

We won’t predict whether BDC prices will go to new heights or not and over what time period.

We’ve been humbled enough by Mr Market over the years.

Nonetheless, we can’t help pointing out that we’re entering unknown territory here as many BDCs are reaching PE multiples rarely – or never – seen before.

In the past, these moments of high enthusiasm have typically not lasted for long as many investors can’t help but blink at these prices and “take profits”.

That would take prices off these highs but not necessarily drop off by much.

Unexpected

Worse, as happened in mid 2014, some exogenous event comes along and sends the whole sector down the hill that has just been climbed.

Unfortunately, the chart we’ve ben trying to illustrate this point with won’t print, but the BDC sector dropped (15%) in between July 1 and December 31, 2014.

That drop continued till February 2016 and resulted in a (33%) total decrease.

Warning

This is not a sector of the financial services industry where investors have much loyalty to their investments and today’s BDC big spender can be tomorrow’s big seller.

BDC investors – both those long the market or thinking of buying in – would be well served to be cautious at this time.