BDC Common Stocks Market Recap: Week Ended December 4, 2020

Confusing

You’d never know this by just looking at the price of BDCS alone, but the BDC rally marches on.

BDCS – the UBS Exchange Traded Note which owns most of the BDC stocks – ended the week at essentially the prior Friday’s close.

However, the Wells Fargo BDC Scorecard Weighted Index – our other sectoral measuring tape – was up 2.42%.

Supporting Evidence

Even more pertinent, the number of individual BDC stocks up or unchanged in price over the prior week was a healthy 36.

(By the way, the S&P 500 continued to move upward: by 1.67%.

There would be no BDC rally without that broader optimistic sentiment that gripped investors in the beginning of November and has not let go.

The S&P 500 index is up 13.1% since October 30, 2020, and BDCS has jumped 15.3%).

The Way It Is

The Wells Fargo index we mentioned has risen 26.0% on a “total return” basis.

This is what a broad market rally looks like.

That’s also reflected in the number of individual BDC “boats” being lifted by the rising waters.

Last week, we were at max capacity: 45.

This week there were still 39 in the plus column.

Even five weeks into this rally a remarkable 20 BDCs increased 3.0% or more in price and only 1 dropped by (3.0%) or greater.

Again, that’s not quite as robust as the four preceding weeks, but still impressive.

Traditional Measuring Stick

Furthermore – another favorite metric of the BDC Reporter also suggests increasing investor enthusiasm for the sector:

The number of BDCs trading above net book value jumped to 12 from 10 the week before and 7 at the end of October.

Back in March of this year no BDC stock traded above book value.

Big Mo

Given that we have been motoring along for weeks now, the momentum metrics look positive as well.

Using the 50 Day Moving Average, every public BDC is ahead on price and 43 are higher on the 200 Day Moving Average.

The only two BDCs left behind by the latter measurement are Capitala Finance (CPTA) and Great Elm Corporation (GECC).

Twist In The Tale

Speaking of individual BDC stocks, the biggest winner this week in percentage of price increase terms was …. CPTA.

The BDC jumped 20.85% in five days.

CPTA was followed by another underperforming BDC with a tiny market capitalisation and poor prospects: Harvest Capital (HCAP).

That BDC’s price jumped 18.1%.

Least

Getting on the podium in third place was Medley Capital (MCC) – a BDC with no secured financing; an ever dropping NAV Per Share and which has just parted its ways with its external manager.

MCC has not yet reported its quarterly and annual results – the last hold-out of this period’s earnings season.

Don’t get your hopes up too much for MCC.

Last quarter the BDC managed to post a loss of Net Investment Income Per Share of ($0.26) – a singular achievement rarely matched in BDC history.

Rooting Around

That tri-fecta at the top of the BDC weekly price table is another reminder that we are in the speculative phase of this rally.

That’s been the case for the last several weeks and continues.

In This Together

Nonetheless, with the benefit of short term hindsight – and great data from Seeking Alpha about 1 month price performance – we can see that every BDC has benefited from this surge of investor enthusiasm.

According to SA every BDC is up in price over the latest  4 week period (which roughly corresponds with this rally), even if the range is very wide : 6% to 95% !

42 of the 45 have seen their price increase by a double digit percentage.

25 of the 45 have increased by 20% or more.

5 of the 45 have increased by 50% or more.

Love Actually

The market has found something to love about every BDC.

We’ll be the first to admit that BDC earnings season was relatively positive on a fundamental basis, with progress being made on portfolio yields; credit trends; liquidity and market outlook.

Let’s Be Honest

However, even the owners of the most rose-colored glasses out there would have to concede that there are multiple trouble spots that have come to light or been confirmed in this quarter’s reports.

We’re loath to pick on any particular BDC on these pages, but reviewing the 44 BDCs that have reported, we could name several that continue to have outsized question marks hanging over them as we wind up 2020.

In fact, we count 20 BDCs that are facing risks serious enough to endanger their ability to pay an unchanged dividend in 2021, or pay out anything at all.

Long In The Tooth

Apparently, though, investors have hurdled their “walls of worry” without exception.

However – and we hate having to be a wet blanket – if past is prolog, expect to see a re-think by investors before long.

Maybe the enthusiasm will last through the year or even to the Inauguration but we can say from harsh experience that this sort of unalloyed; broad based enthusiasm never lasts in BDC-land.

It’s an early Christmas gift, but also too good to be true and should be treated with caution.

What the market gives can be quickly taken away.