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BDC Common Stocks Market Recap: Week Ended May 28, 2021

Posted on June 1, 2021

 

BDC COMMON STOCKS

Multiple BDCs

Week Twenty One

Highest

If you’ve been reading the BDC Reporter’s daily Market Agenda series, you’ll know that the BDC sector reached another 52 week and YTD high on Friday May 28, 2021.

Understandably enough, this has been the most important headline of a week filled with a number of other developments.

Using BDCZ – the UBS Exchange Traded Note which owns virtually all BDC public common stocks – we reached a price of $19.58.

That’s 1.3% higher than the Friday before  and higher than the prior BDCZ record of $19.50.

Constant

Four days out of five prices moved up.

Even more impressively, in the last twelve market days, BDCZ has been down only once.

Both Ways

On a total return basis – and using the Wilshire BDC Index which we’ve switched to for this purpose – the BDC sector was also up 1.3% on the week.

YTD, the return is 27.72% and over 12 months 58.74%.

Ever Higher

After updating each BDCs 52 week low and high price, we noted that 10 BDCs out of 43 reached new apexes this week, versus 9 last week.

Overall, a remarkable 32 BDCs – three quarters of the universe – are trading as of Friday within 5% of their 52 week high and 41 within 10%.

Left out are Investcorp Credit Management BDC (ICMB), off (10.2%) and Great Elm Capital (GECC), off (32.6%).

We count 17 BDCs trading at or above book value, unchanged from the week before.

The Big Mo

Momentum is certainly to the upside, with 39 BDCs trading above their 50 day moving average and 42 above the 200 day moving average.

BDC old timers are familiar with this phenomenon: BDC common stock prices tend to move up – and down – as a group.

We’ve been in a major upsurge since March 30 of last year, as the chart below illustrates:

Get Back

Also noteworthy is that BDCZ is only (4.2%) off its then high level on February 20, 2020, just before the pandemic hit out of a blue sky.

We then went from BDCs highs to all-time lows in just over a month in a relentless way that the sector had never experienced before.

Judging by the way BDC fixed income prices also dropped like stones in this period, many investors believed multiple BDC bankruptcies were in the cards.

As readers will remember that sense of dread was compounded at times by some the BDCs themselves taking precautionary measures like suspending or deferring their distributions.

Other BDCs were forced into emergency Rights Offerings and/or raising debt capital at onerous rates – especially compared with current market yields.

Now those same investors and BDCs – just over a year later – are universally bright eyed and optimistic about the future.

Numbers Tell The Story

Based on the recent results and the analyst EPS outlooks for 2021 and 2022 you can’t fault them.

BDC fundamentals are in good shape and getting better.

As always, the risk to BDC prices lies in events exogenous to the sector.

Brief Historic RunDown Of The Meltdowns

Back in 2011 worries about the European financial system caused a 28% drop in BDC sector prices in a few weeks.

Then in 2014, when oil prices dropped, so did the BDC sector.

That took twenty months to play out.

In early 2016 and again in late 2018 all the markets began to worry about an impending recession and BDC investors joined in.

We spend a good deal of time delving into the minutiae of individual BDC performance but when looking for where the next downdraft will come from, it’s likely to be some “known unknown” from outside.

For The Moment

Until that new perceived threat arises – and we’ve already overcome passing worries about the outcome of the election; the renewal of inflation and the implosion of crypto – the BDC sector should be alright.

Obviously, prices are very high based on all the typical metrics, but are hardly in “bubble” conditions that we’re seeing elsewhere.

Those are real assets and real earnings supporting those many BDC price highs.

Admittedly a few BDCs are trading at seemingly absurd price to earnings multiples, like Main Street Capital (MAIN) at a 17.3x 2021 projected Net Investment Income Per Share.

However, that’s more the exception rather than the rule.

PE Analysis

We calculated the PE ratio for 37 BDCs (leaving out CPTA, PFX, OFS, PTMN, HCAP and FSKR) using the latest price and 2021 analyst consensus.

The average PE multiple was 11.9x.

The plurality of BDC prices were in the 10x-12x range.

This demonstrates that the BDC sector, while by no means dirt cheap or any kind of cheap, remains within the bounds of normality.

Furthermore, we also noted that 26 of the 37 stocks we evaluated are expected to increase EPS in 2022 versus 2021.

(The average increase for the whole group is 1.7%).

All the above suggests to us that high BDC stock prices will be with us for some time till SOMETHING alarms the markets.

The Bad News…

At that point, though, you might expect to see BDC prices drop sharply given the elevated nature of the sector at the moment and a long standing history of many investors hitting the Sell button  at the first sign of trouble.

As last year proved – rightly or wrongly – a BDC common stock is not an investment that investors “have and hold” through good times and bad.

That may be opportunity for some and high volatility for all.

 

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