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BDC Common Stocks Market Recap: Week Ended June 18, 2021

Posted on June 21, 2021
 
BDCs: Multiple 

BDC COMMON STOCKS

Week Twenty Four

 

Downdraft

Nothing lasts forever and that certainly includes red-hot BDC stock prices, as this week demonstrated.

Using BDCZ as our guide  – the UBS Exchange Traded Notes which owns virtually all the public BDC stocks – the sector dropped (3.62%) in the past 5 business days.

BDCZ closed at $19.46.

By the way, that means BDCZ is (4.1%) off its 52 week high of $20.29 that was set June 10. 

Switching over to the Wilshire BDC Index – which provides a “total return” picture – the drop was (3.44%).

We’ve not had such a large percentage drop since the week ended 10/30/2020 – not coincidentally the lowest point before the current rally began.

 

Ugly

All the metrics that we’ve been writing on these weekly recaps about looked terrible taken in isolation.

Of the 41 BDCs remaining after the departure of Harvest Capital and FS KKR Capital, 39 dropped in price.

Adding insult to injury, some of those BDC stocks in the red were down by a substantial percentage.

28 BDCs were down by (3.0%) or more, including two by more than (10%).

Those were Newtek Business Services (10.71%) and Capital Southwest (10.67%).

A week before 38 BDCs were trading within 5% of their 52 week high, now there are just 10.

Also telling, we’ve gone in the same period from 22 BDCs trading above book value to 14.

 

Parsing

So what was this all about ?

Some will point to the recent Fed meeting and the slightly higher possibility that short term interest rates will begin to increase in late 2022 rather than 2023.

That seemed to impact the broader markets – already looking for something to worry about after hovering at all-time highs just a few days ago.

The S&P 500 dropped (1.9%) this week and (2.1%) from its highest ever price on June 14, 2021.

This was a clarion call for investors generally – including those holding BDCs – to undertake some profit taking, especially as most ex-dividend dates have passed for the IIQ.

The two biggest losers in percentage terms we mentioned above  –  (NEWT and CSWC) – are also amongst the best performers in terms of dividend, book value and NAV Per Share increases.

Moreover – regardless of those major price pullbacks – the outlook for both remains rosy.

 

Deep Breath

Let’s put the week’s price bloodbath in a wider perspective:

Seeking Alpha data indicates that over the last one month 23 BDCs remain in the black price-wise and 18 are in the red.

Using a 200 day moving average, 40 BDCs remain in the black, with only Great Elm (GECC) in the red.

On a year-to- date basis, 40 of 41 BDCs are still up in price.

Over that period, BDCZ has increased 19.9% and the Wilshire Index by 27.3%.

Going back to the beginning of what we call the “Halloween” 2020 rally, BDCZ is up 48.7% and 114.8% from the darkest days of the pandemic in March 2020.

All to say that this week’s poor price performance has barely made a dent in the broad based rally that has been in place for over a year.

 

Further To Go ?

Which is not to say that the pullback could not continue.

Of course, with so many investors sitting on substantial unrealized gain that typically causes price drops to accelerate in a form of FOMO.

As the BDC Reporter mentioned earlier, we’ll be looking to see if BDCZ drops beneath $18.30 – its lowest level back in mid-May when the sector – and markets generally – had their last freakout.

 

Reassurance

We’ll close, though, by reminding readers that BDC fundamentals remain good in almost all the players.

For what it’s worth, our own 5 year projections of BDC dividends and target prices indicate 22 players should generate an annual “total return” in excess of 10.0%.

That includes two BDCs with projected annual returns north of 15%.

We could be wrong in our estimates, but if we’re not,  it’s hard to imagine that investors – scouring the markets for double digit returns – will go from buying up every BDC stock out there to walking away from those sort of potential returns.

Clearly what happens in the week ahead to BDC prices will provide some insights, but we may have to wait several more weeks – and till BDC earnings season – to get a clearer take on the way forward.

 

Sticking Our Neck Out 

The BDC Reporter continues to believe the pullback that began this week will remain relatively shallow and not reach even “correction” status.

Given that the highest high was $20.29, BDCZ would have to drop below $18.3 to be in correction.

Thanks to its remarkable volatility, there’s rarely a dull moment when the BDC common stock sector is concerned.

 


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