BDC Common Stocks Market Recap: Week Ended June 25, 2021Posted on June 28, 2021
BDC COMMON STOCKS
When we last wrote the Market Recap, BDC common stocks were in retreat in price terms, as were the major indices.
Investors in the sector had just endured the biggest percentage drop in BDC prices since Halloween 2020 – seemingly a lifetime away.
For our part, while we did not preclude a further sag in BDC prices, the outlook remained favorable, underpinned by strong fundamentals:
“The BDC Reporter continues to believe the pullback that began this week will remain relatively shallow and not reach even “correction” status”.
So far – and we’re only one week along – our cautious optimism appears to have been justified.
Both the broader markets and the BDC sector bounced – partly – back this week, recovering more than half of the ground lost.
BDCZ – which closed Friday June 18, 2021 at $19.46, moved up to $19.83, a 1.90% gain.
(The S&P 500 – thanks to a possible infrastructure deal coming out of Washington D.C. – was also up, reaching a new high).
While the week before only two individual BDCs eked out a price gain, this week there were 32 amongst the 41 we track.
Amongst the 32, 6 increased in price by 3.0% or more.
Top of the list in this regard was Prospect Capital (PSEC), up 4.75%.
Following were Bain Capital (BCSF); Gladstone Investment (GAIN); Saratoga Investment (SAR); Owl Rock Capital (ORCC) and Main Street Capital (MAIN).
Conversely – and in sharp contrast to the week before – no individual BDC stock dropped (3.0%) or more in price.
Ironically, the biggest percentage loser was OFS Capital (OFS) – down (2.98%) during the period – but also one of two BDCs that reached a new 52 week high intra-week.
OFS reached $10.30 on Monday (just before its dividend) before closing Friday at $9.78.
The other BDC to reach a new 52 week high was Barings BDC (BBDC), presumably boosted by a favorable analyst call from Derek Hewett of BofA Securities .
Here are some of the highlights of that call, copied from a Seeking Alpha article on the subject:
- “BBDC “has successfully repositioned the old Triangle Capital franchise, creating a high quality BDC with a sustainable business model, in our view,” Hewett writes in a note to clients.
- Both profitability and earnings visibility have improved and its MVC Capital acquisition, along with other cross-platform opportunities, “suggest further earnings upside over time,” he adds.
- Lifts price target to $11.25 from $9.00 and increase core EPS estimate for 2021 to 89 cents from 86 cents and for 2022 to 92 cents from 88 cents”.
We can’t say we differ with any of the characterizations above.
The BDC Reporter’s own “price target” for BDDC – looking out 5 years – is $12.32 – 9.5% higher than BOfA and 16.3% above the current price.
Over half a decade that’s an aggregate total return of 58%, or 11.5% per annum.
We assume the current $0.80 annualized dividend will increase up to $0.88 and the terminal price assumes a multiple of 14x the payout, versus 13.6x currently.
All to say that our price target may be based on more aggressive assumptions than BofA’s.
Anyway, at BBDC’s current price of $10.59, the current yield is 7.6%.
YTD, the stock is up 15.1%.
With this week’s upward jag, 32 of 41 BDCs are in the black over a 1 month period and 40 of 41 YTD.
Using a 50 Day Moving Average price, 23 BDCs are in the black and 18 in the red.
If we switch the lens to a 200 Day Moving Average, all BDCs are ahead.
Furthermore, the number of BDCs trading above book has moved up to 16, or 39% of the total.
On a YTD basis, BDCZ is up 22.2%.
The Wilshire BDC Index – using its total return function – is only (1.7%) below its YTD and all-time high (using weekly Friday closing prices).
All the above to point out that the BDC sector may no longer be at the top of Everest in price terms, but is only slightly below.
Now that dividends have been paid out and with earnings season only a few weeks away, we may yet see the sector reach even higher heights than on June 10 when BDCZ reached $20.29 intra-day, the apex to date.
As always, much will depend on the animal spirits in the broader markets and whether the BDC Reporter’s optimism about higher book values and stable to increasing earnings showing up in the IIQ 2021 results proves accurate.
In fact – and it’s a sad reflection on how the tail wags the dog where BDC stock prices are concerned – we could envisage higher BDC prices as part of general market enthusiasm even if BDC results were weaker than anticipated, but not if the major indices weaken for whatever reason.
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