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National Securities expects outperformance from BDC stocks in the second half of the year. Analyst Andrew Kerai tied recent declines to technical selling related to index changes.
"YTD we estimate that BDC stocks have posted a total return of roughly -3.7% (-6.5% capital loss partially offset by roughly 2.8% appreciation from dividends). We believe this has been primarily driven by the announcement that BDC stocks will be removed from the Russell Indices on June 27, 2014, which we estimate has resulted in roughly a 10% sell-off since the announcement earlier this year. While this event has been unfortunate for BDC investors, and we believe technical selling pressure may continue through the rebalancing date, we believe the sell-off has created a potentially attractive opportunity for existing holders to add to their positions and new BDC investors to enter the space at depressed valuation levels," said Kerai.
"Once the rebalancing date passes at the end of June 2014, we expect BDC stocks may outperform both other financial sector stocks and the S&P 500 during 2H14 as BDC stock valuations should improve. It is our view that the technical selling pressure has resulted in some BDC stocks trading at a material discount relative to their underlying fundamentals, which we believe remain strong overall. We expect BDC fundamentals should remain favorable throughout the remainder of 2014, and believe investors may have the opportunity to acquire shares in some of the stronger BDC names at favorable valuation levels following the Russell Index rebalancing date next month, creating an attractive entry point. We believe BDC investors should continue to focus on companies with strong dividend coverage and portfolio credit quality which are trading at modest valuation levels. We estimate that BDC stocks are currently trading at roughly a P/2015 NII multiple of 10.1x, dividend yield of 9.9%, and P/NAV of 0.96x," he added.
National Securities has buy ratings on Horizon Technology Finance Corporation (NASDAQ: HRZN), Medley Capital Corp. (NYSE: MCC), OXFORD LANE CAP (NASDAQ: OXLC), FIFTH ST FINANCE (NASDAQ: FSC), Prospect Capital Corporation (NASDAQ: PSEC), and Hercules Technology Growth Capital (NYSE: HTGC).
Shares of Horizon Technology Finance closed at $13.91 yesterday.
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