AINV

Risky Business: Business Development Companies

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Big name business development companies (BDCs) such as Prospect Capital () and Main Street Capital () continue to be vulnerable equities, in our view, particularly as credit conditions deteriorate. Ongoing pressure in the energy and metals and mining markets has increased the wariness of investors and their propensity to tolerate weak credits (and those tied to them), and several factors loom that may significantly increase the already-high level of business-model risk associated with BDCs. Investing in these relatively obscure publicly-traded “venture capital” entities is not for the faint of heart. The market may bear witness to a surge in defaults within the high-yield arena in coming years, and a prolonged weakness in commodity prices may seal that fate. Mostly overleveraged upstream … Read more

Asset Managers: Capital Retention In the Name of Capital Preservation

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In recent years, the operating theme for many asset managers has shifted to capital preservation, particularly in their efforts to serve the large and growing number of baby boomers and commercial clients managing pensions. This is a reasonably expected change when considering that many investors lost a significant amount of capital during the Financial Crisis, many of which are still recovering. The ramifications of the credit crunch have led to requirements for increased transparency and regulatory compliance, adding structural costs to the asset-management business model, but this is only one side of the coin. The volume of investable assets is set to increase to a whopping $102 trillion by 2020 from ~$64 trillion today, fueled by an increase in the … Read more

Speculative Stocks Sinking

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“The world economy is in its worst shape since the Great Recession. And medium- to low-grade corporate credits will not escape the drag of global malaise.” – Moody’s, September 25, 2015 All is not well in the “medium-to-low grade corporate credit market, and if a warning from Moody’s wasn’t enough, famed activist investor Carl Icahn (IEP) applied more pressure with his controversial and headline-grabbing 15-minute video, “Danger Ahead.” We think it makes sense to be cautious in today’s gyrating market environment, which continues to face a number of tangible headwinds, not the least of which are stretched equity valuations, “broken” technicals, and worsening sentiment. The collapse in China’s stock market, its potential knock-on effects across the global banking system, the … Read more

Prospect Capital Cuts Dividend

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As is often the case, the larger the dividend yield the more risky the payout. I talk about this quite a bit in the video: ‘Dividends, Dividends, Dividends.’ Please have a look. All else equal, we tend to prefer cash-flow-based operating companies such as Microsoft (MSFT) rather than opaque, risky structures such as business development companies (BDC’s), where traditional fundamental analysis is less-informative. Sure enough, a dividend cut at Prospect Capital (PSEC) came in a warm holiday package today. The business development company announced that it will reduce cash dividends to shareholders to $0.08333 on a monthly basis with the following record and payment dates: 8.333 cents per share for February 2015 (record date of February 27, 2015 and payment … Read more

Valuentum Economic Castleâ„¢ Rating Update

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Read: Keeping the Horse Before the Cart: Valuentum’s Economic Castle™ Rating The Economic Castle Focuses on the Magnitude of Economic Value Creation The Valuentum Economic Castle™ rating is an enhancement of the competitive advantage framework (commonly known as economic moat analysis) that has become widespread and ubiquitous within the investing world. Whereas an economic moat framework evaluates a firm on the basis of the sustainability and durability of its competitive advantages, Valuentum’s Economic Castle™ rating evaluates a firm on the basis of the firm’s future economic profit spread (return on invested capital less its weighted average cost of capital). The companies with the strongest Valuentum Economic Castle™ ratings are poised to generate the most economic value for shareholders in the … Read more

Surveying Fourth Quarter Performance at the Money Center Banks

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Let’s examine a number of reasons why we don’t prefer banking entities and take a look at recent performance from industry constituents. A challenging rate environment and declining mortgage originations offer key headwinds.

Taking a Look at Main Street Capital

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Business development companies (BDCs), which help small companies in early stages of development (similar to venture capital firms), have been around in the US since 1980 when Congress amended the Investment Company Act of 1940. The amendment essentially gave individual investors the opportunity to invest in a publicly-traded private-equity firm. Though many are not as prominent as firms such as KKR, Bain Capital, or TPG Capital, there are a number of prominent business development companies that are publicly traded, including Apollo Investment Corp (AINV), American Capital Strategies (ACAS), and Ares Capital (ARCC). Since these investment vehicles have become increasingly popular with income-seeking investors, we’ve decided to take a deep look at the sector, and Main Street Capital (MAIN) in particular. Main … Read more

2,350-2,750 on the S&P? Could the Coronavirus Catalyze a Financial Crisis?

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Image: We think a rather modest sell-off in the market to the target range of 2,350-2,750 on the S&P 500 is rather reasonable in the wake of one of the biggest economic shocks since the Global Financial Crisis. The chart above shows how far markets have advanced since 2011, and an adjustment lower to the target range of 2,350-2,750 is rather modest in such a context and would only bring markets to late 2018 levels (note red box as the target range). The range reflects ~16x S&P 500 12-month forward earnings estimates, as of February 14, adjusted down 10% due to COVID-19. When companies like Visa talk about a couple percentage points taken off of growth rates, one knows that … Read more

How to Think About Corporate Tax Reform

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Nelson: The 16 Most Important Steps To Understand The Stock Market

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A previous version of this article appeared on our website July 21, 2013. Refreshed and updated throughout, as of July 2018. By Brian Nelson, CFA After earning my MBA at the University of Chicago Booth School of Business and training stock and credit analysts from large organizations over the past decade or so, I have heard just about every question (though I admit I am still surprised by many things and remain a very humble student of the markets). I’ve also spent years perfecting the discounted cash flow process for large research organizations such as Morningstar and studied under one of the most famed aggressive growth investors of all time, Richard Driehaus. My knowledge runs the gamut from value through … Read more