“We’ll stick with the party line of these past few weeks and project that we still expect BDC prices to move higher in the short term.
Or, at the very least, remain in this narrow channel a little longer”.
That’s an extract from the BDC Reporter’s sentiment last week, which turned out to be a fair summary of what happened through September 21, 2018.
For the first time in two weeks, the UBS Exchange Traded Note with the ticker BDCS – which covers the industry – turned upwards.
BDCS ended up at $20.90, up 0.72% on the week.
That other sector indicator – the Wells Fargo BDC Index on which BDCS is based but counts “Total Return” was up 0.30%.
The recent pull-back in the BDCS price lasted only 10 days, with BDCS peaking at $21.03 on August 30, 2018 and dropping to $20.73 on September 10.
That’s under a (1.5%) drop and consistent with the other bumps along the way that BDCS has endured since the current rally began March 1, 2018.
The rest of the metrics we consistently review from week to week also suggests a continuing (mildly) positive environment.
This week, 17 individual BDCs were up in price or flat, same as the week before.
Moreover, 21 BDCs were trading at a price above their 50 Day Moving Average, almost unchanged from 22 the week before.
Using the 200 Day Moving Average as our threshold, the number of BDCs in the green was an unchanged 32 out of 45 in our universe.
Likewise, the number of BDCS whose stock price matched or exceeded their book value remained at 13 for another week.
Relatively speaking there was little drama amongst individual stock price movement on the week.
We had only one BDC up in price by 3.0% or more.
WHF was up 4.4% in the period.
Still, the BDC’s stock price remained 12% off its 52 Week High and has moved only 0.2% over a 4 week time frame.
Presumably investors continue to be torn between the BDC’s good results and promise of higher earnings and the prospective sell-off by insiders of their stake.
As an aside, we’ve noticed in the case of WHF and all the other BDCs that have received shareholder approval of higher leverage as allowed by the SBCAA that the market reaction has varied widely.
Admittedly, the number of BDCs with what we have called the Golden Ticket is still relatively small (11), and most have not materially changed performance-wise since getting the shareholder nod.
Even those who have – and this week NMFC was busy adding ever more debt as detailed in an article on September 21, 2018 – are still in the midst of a campaign with many quarters to go.
In fact, the BDC Reporter has been pushing back our estimate of when the landscape of the BDC sector will be fully changed by the SBCAA to 2021, rather than 2020 as we first expected.
There’s just so much more in the way of debt to be raised, and so many more assets to be added before this process is complete.
Moreover, in a market with ever more competition from new and existing players just holding onto existing assets is a daily challenge.
Anyway, we compared the stock price changes of 10 of the BDCs (we left out BBDC which is a special case) that have shareholder approval versus BDCS over a 1, 3 and 6 month period.
Over 6 months, 7 of the 10 have moved up more than BDCS, over 3 months 6 and over the past month just 2.
This suggests – at least to us – that there’s no automatic market embrace of BDCs that are “leveraging up”.
Instead, investors seem to be in a “I’m from Missouri, you’ll have to show me”.
To use WHF as an example – and illustrating with a chart – here’s price performance since May 31, 2018 when the draft Proxy requesting SBCAA approval was filed, versus BDCS.
As you can see, after outperforming BDCS in the beginning, WHF now trails the sector result over the entire period.
Also during the week, 3 BDCs dropped 3.0% or more in price.
These were HRZN, GECC and NEWT.
We are putting down the outsized price movements to the normal ups and downs of relatively thinly traded stocks.
On Friday none of the 3 traded more than 80,000 shares. To put that in perspective ARCC traded 1,528,720 shares !
We continue to see no catalyst for a sudden drop in BDC values, except for a potential change in overall market sentiment, which is a permanent feature of the investing landscape.
As a result, the short term outlook for BDC investing remains for a gradual move upwards, accompanied by an occasional minor pullback.
We expect we’ll see (adjusted for dividends) BDCS reach $21.00 a share (last achieved 8/31/2018 in these Recaps), rather than $20.69 (hit on 8/24/2018).
On the other hand, there is no obvious trigger for a sudden Great Leap Forward.
We will probably have to get closer to third quarter earnings season before sober minded BDC investors and analysts decide whether to put their foot on the accelerator.
Check back weekly for the latest.