Honestly, we’ve been hunkering down where BDC common stock investing is concerned since late February 2019 when the sector reached its 2019 high. That high point is a frequent reference point in the BDC Reporter’s Common Stock Market Recaps. Here’s a link to the latest iteration. We’ve sold out of positions that were causing us concern: principally Pennant Park Floating (PFLT) and OFS Capital (OFS), but also Capitala Finance (CPTA), Gladstone Investment (GAIN) and Main Street Capital (MAIN) out of a surfeit of caution.
PFLT we exited at $12.09 and at a loss. We were on vacation and did not have time to post an article, but listed the sale in the BDC Reporter’s Investment Disclosure Table, available to all registered readers. After digging into the portfolio following the IQ 2019 results and the announcement of 4 loans moving into non accrual, we decided to be safe rather than sorry, especially as there are 4 other under-performing material investments in the portfolio. PFLT is off our Buy List for the medium term till the credit picture clarifies. Since we sold - at $12.09, PFLT has slumped to $11.70.
OFS we exited at a gain because of concerns expressed in a post on May 7. The actual dispositions were strung over several months, ending in early May. We did have a relatively large position and our concerns grew over the period. We went from lightening our load to clearing out our exposure in the stock. Like PFLT, OFS is off our Buy List for the moment. BDC investing is a long term proposition and we’re comfortable waiting on the sidelines till the risks we’ve identified have gone or reached acceptable proportions. The stock is trading close to what we sold it for.
CPTA we axed mostly because of a change in our BDC Fund investment policy to avoid any speculative stocks or so-called Special Situations positions. We believe that the BDC stock price could see a short term bump upwards but we’re still concerned about its fundamentals, so we sold. CPTA is not on our Buy List and unlikely to get back on for some time. We sold at $8.37. CPTA is currently at $8.57, but we have no regrets. Like so many BDCs we’re repositioning our portfolio into “safer” investments and CPTA - which has seen its stock price drop by more than 50% since going public - does not fit that bill, whatever the short term price movements.
At GAIN we were worried as far back as January 28, 2019 - before the last two earnings releases - about credit quality despite high actual and potential gains elsewhere in the portfolio. We sold out at $10.56, the stock price moved higher. Sigh.
However, the latest results did confirm some of our concerns so we stay away, even though GAIN is on our Buy List. The stock price has dropped back towards the level at which we sold.
Likewise at MAIN we had long term credit and profitability concerns early in 2019. Mostly we were worried that the perpetually over-valued BDC with its unique track record might get revalued downwards and we sought to get out early. Which we did, selling at $36.9. Of course, the stock has since climbed, even going over $40 a share but has dropped back to $39.85 as we write this. Regrets ? We have a few… about not maxing out our capital gain. However, the all-in dividend yield at the price we sold out at is only 8.0%, which was another reason we opted out. MAIN remains on our Buy List at the right price.
Which segues into the point of this post. We believe - based on the cracks that have appearing in BDC sector prices and the current miasma in the markets surrounding tariffs; the possible weakness of the U.S. economy and the prospect of lower interest rates - that there’s a good chance we may face another December 2018 market meltdown. Certainly BDCS has dropped in just a few days to as low as $19.29, or the lowest level since mid-February. We are now (4.6%) off the YTD February 22, 2019 high. Sadly, we’re close to “calling” the BDC rally that began December 24, 2018. A 5% downside move from a high is our typical standard.
Today 40 BDC stocks are down/flat, only 5 are up. A few stocks - including two investor favorites - are taking a bath (PSEC and GSBD). Looks like profit taking to us as investors take chips off the table. This augurs a buying opportunity , most likely, down the road. In the immediate future the odds seem to suggest, though, some more pain coming to the BDC market. In these situations - to our minds - it’s best to sell or …”hunker down”. Which means sitting there and watching your remaining common stocks drop in value for some time. (Thank goodness for distributions). We’ve weeded out our most questionable credits and have plenty of cash and/or easily sold BDC bonds looking for a home, so we ‘re likely to just sit tight; ride out the storm that might be headed this way and see what comes after. We could be wrong - because no one can read the market tea leaves - but we choose caution and always will 10 years into an economic expansion and any time the word “war” is mentioned 1,000 times a day.