"You can lock in extraordinary yields right now from Business Development Companies," says Adrian Day.In his The Global Analyst he reviews a trio of mezzanine finance firms.
"Though many of the Business Development Companies (BDCs) have experienced modest jumps in their stocks off extreme lows recently, the sector remains weak.
"Clearly, conditions are tough: a sluggish economy means difficulty for some of the businesses in which they invest, as well as markdowns on the valuation of these holdings (exacerbated by the new mark-to-market accounting rules).
"However, so far real difficulties have generally been much less than might have been expected and less, so far, than in the 2001 recession. But the market is certainly concerned about further credit problems while the volatile valuations cause confusion.
"A particular difficulty for these companies is their inability to issue new capital below NAV, and many of the stocks are currently trading below net value. Because BDC’s are required to pay out all of their net operating income they need to issue new equity to grow. The solid ones will survive and grow We like the companies, however.
"We have seen these periods of weakness before, and traditionally, credit crunches have been a good time for the stronger companies since they are able to take advantage of difficulty lending markets to make attractive loans to the pick of the small-business crop.
"The stocks tend to be very volatile. Right now, our top buys would be Gladstone Capital (NASDAQ: GLAD), Gladstone Investment (NASDAQ: GAIN), and American Capital (NASDAQ: ACAS)
"Gladstone Capital is arguably the most conservative of the sector. Gladstone Investment, the newer and smaller company which has had difficulty growing, but the rights offering provides the cash to grow and hopefully earn its dividend in coming quarters;
"American Capital, a much larger and more diversified company, one of whose holdings is potentially involved (inadvertently) in the manufacture of tainted heparin; the investing companies, such as ACAS, are traditionally insulated from legal problems at their holdings.
"We continue to firmly believe that accumulating the better quality of these companies during the current price weakness—and given the stock volatility, always look for extreme weakness—will reap slid benefits for years to come."
