Prospect Capital: Flying Higher?
Frankly, Prospect Capital Corp. (NASDAQ:PSEC) has surprised me, positively. The high-risk business development company with not the greatest reputation in the income investor world has convinced with a strong reversal of its share price in 2016, after getting clobbered at the beginning of the year. Prospect Capital was kicked to the curb in January and February of this year due to its (limited) exposure to the energy sector in light of the energy price rout, but the company has made a comeback on investors’ shopping lists as oil prices bottomed, energy markets rebalanced, and concerns over Prospect Capital’s energy loan book eased.
Prospect Capital’s shares have risen 20.63 percent year-to-date, which is a remarkable return for a controversial, and partially despised high-yield income stock. The strong rebound has been due to a couple of factors:
1. Energy markets have bottomed out, prices have stabilized. As a result, investors’ expectations over a dramatic spike in loan default rates and a resulting dividend cut have not come true.
2. Prospect Capital delivered a good third quarter, with Net Investment Income hitting $0.25/share, which covered the BDC’s dividend payout. Prospect Capital’s Net Asset Value also remained fairly stable, slipping only $0.04/share to $9.61/share.
Read also: ‘Prospect Capital: Come On, Admit It, That Was Not A Bad Quarter At All’.
3. High-yield income stocks as a group continue to be the only path for income investors these days to earn a good yield because U.S. interest rates remain suppressed by the Federal Reserve. High-yield also did extremely well during the Brexit-induced market sell-off at the end of June.
All considered, 2016 is shaping up to be a really good year for BDC/Prospect Capital investors.
Source: StockCharts.com
Solid 4th Quarter Could Drive Prospect Capital’s Shares Even Higher
Prospect Capital will release Q4-16 financial results next week, on Monday, August 29, 2016 after the stock market closes. I expect the business development company to report rather unspectacular financials, with Net Investment Income likely to clock in somewhere in the range of $0.24-$0.26/share, whereas the Net Asset Value is likely to remain stable in a range of $9.50-$9.70/share.
High-risk business development companies like Prospect Capital stand to get rewarded for average results. If Prospect Capital just manages to cover its dividend with Net Investment Income, and creates dividend visibility by announcing stable monthly dividends of $0.08333/share until the end of December, shares could surely fly higher from here. The only thing Prospect Capital needs to do is to not mess up.
Read also: ‘Prospect Capital: I Am Raising My Short-Term Price Target To $9’.
Your Takeaway
Prospect Capital has not been a bad investment in 2016. The BDC’s shares have gained more than 20 percent this year, and are now priced at a 12.4 percent discount to the last reported Net Asset Value. Further, Prospect Capital’s shares have traded up to $8.48 last week, reaching a new 52 week high thanks to improving investor sentiment and growing expectations over a solid fourth quarter for the BDC. Buy for income and capital appreciation.
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Disclosure: I am/we are long PSEC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Unique Finance). I have no business relationship with any company whose stock is mentioned in this article.
