BDC Market Snapshot: Week Ended October 7, 2022
Out Of Commission
We were not able to write a Market Snapshot last week - when BDC stocks were once again at their lowest point of the year. (That was reached September 29, 2022). We were traveling and contending with the crash of the BDC Reporter website, which kept us otherwise occupied.
In that Bizarro way of markets, BDC stocks at the end of September were at their most favorable levels all year - and since March 2020 - for any would-be buyer with a long term perspective and ice in their veins. As readers of the BDC Reporter know, BDCZ - the UBS sponsored Exchange Traded Note which owns most BDC stocks and serves as a price guide - fell (5.7%) to $15.52. That left BDCZ (25%) below its highest point of 2022, reached in April . No less than 34 BDCs reached 52 week lows the week ended September 30.
Back In The Saddle
If ever there was a time to "buy low " - "sell high" will have to wait a long time - that was the right one. We're now a week on - back in the U.S. and with the BDC Reporter's website sorted, and after a mini rally in the first two days of October that fizzled by left BDCZ 3.35% higher than the week before.
However, anyone looking for good value in the BDC space should not despair. If our many projections and assumptions are right, the Expected Return Table shows there are still plenty of buying opportunities.
The BDC sector is still very much out of favor with investors. We show that out of the 43 BDCs we track, 30 offer 5 year "total returns" of 100% plus, and another 9 returns between 75%-100%.
The highest return we show is 195%. That's for the perennially out of favor Cion Investment (CION) - which has been a Best Idea pick earlier - but currently trades at a price of $8.48, which is (44%) below its 52 week high. Investors may have decamped but the analysts continue to hike expectations for CION's earnings per share - now pegged at $1.37 in 2023. Our calculator shows that's a price to future earnings multiple of just 6.2x.
For our part, we continue to not very boldly project CION's quarterly distribution level will eventually reach $0.35 a quarter, only $0.01 per share higher than what the unloved, newly public, middle market BDC achieved in the IIQ 2022. We believe CION is deeply under-valued, while the market seems to be projecting that the BDC's quarterly payout will drop to $0.20 - $0.25. We shall see.
Plenty Of Company
CION may offer the most spectacular pro-forma return, but more appealing for investors looking for opportunities are the large number of other prospects promising to double one's money - and more - over 5 years. Admittedly CION is new to the public market; has a middling track record where credit results are concerned and does not have the origination platform that many of its peers can boast.
If you're looking for a more familiar BDC name there are many to choose from in the Expected Return Table - more than we can name here. There are many players that navigated through the Great Recession - not to mention the 2011 European financial crisis; the oil price crash of 2013-2014; the slump of late 2005-2006 and the "flash crash" associated with the Covid pandemic in 2020. Here are a few notable BDCs of this ilk in the 100%+ return club: GAIN, HTGC, MFIC and PNNT.
Each BDC is very different one from the other in terms of size; strategy; dividend policy, etc. This gives bargain hunters a chance to choose BDCs that fit whatever their view might be of who is best equipped to survive the travails which the Fed might bring to the global economy in the quarters ahead. For our part - and frankly speaking - we're not sure which corner of the BDC market will prove the "safest". After all, there is currently no discernible difference in credit stress in any particular segment, whether lower middle market; middle market; large cap or venture lending. (There are some BDCs performing better than others of a similar type but that will always be so).
We also don't know what the future holds for interest rate hikes (how much ? how long ?); how the economy will respond and whether there will be unintended consequences for what is an unprecedented campaign by a central bank to increase unemployment and - if need be - tip us into recession on purpose. If you don't know how and when you are going to be hit, how can you say with any conviction what sort of BDC will perform best ?
Like Buying IBM
One approach, though, is to forget about investing in the BDCs with the highest prospective returns, but focusing instead on "picking up" positions in players that previously were rarely available at a decent price. Now that investors have lost their nerve - or made a careful strategic retreat - BDC brand names like TSLX (117% return over 5 years); MAIN (123%); HTGC (135%) and CSWC (123%). By the way, what all those BDCs have in common is that they are all still trading at a premium to net book value, even though their stock price has dropped by a third or more in recent weeks. More compelling - all are projected by the analyst community to book higher EPS in 2023 than in 2022. In some cases, the projected percentage increase in earnings is in double digits.
For anyone long BDC stocks right now, the outlook for prices SEEMS to be "lower for longer". The very high prospective returns currently on the table may get even more appealing. In our experience, though, BDC "bargains" don't tend to hang around for too long. We are in a very "dark" period right now, but should the atmosphere lighten MAIN - which was trading over $45 a share a few weeks ago - won't be available at $33.23 for very long.
Both Sides Now
On the other hand, MAIN did trade as low as $14 a share for a nano minute during the even darker days of March 2020 so waiting for an even lower entry point may be worthwhile...Every investor will have a different approach and only with hindsight will the right choice become obvious. At the very least - if one agrees that BDC earnings and net book value will endure through whatever lied ahead - this is a good time to sharpen one's pencils and get shopping carts ready.