Chill In The Air
The BDC sector’s upward trend stalled again this week.
The Wells Fargo BDC Index dropped (1.3%).
Likewise, BDCS – the UBS Exchange Traded Note – saw its stock price drop (0.9%) to $20.72.
That’s the lowest level for BDCS in 5 weeks.
We are on the record predicting that the BDC rally will continue to bump along.
We’re sticking with that sentiment for the moment, but there’s no doubt the numbers are mostly softening.
On the week 17 BDCs were up or flat in price, compared to 21 last week and 27 a month ago.
That means 28 were down in price…
If we look at how many BDCS prices were up over their 50 Day and 200 Day Moving Averages, the results are mixed.
This week 20 were trading above the 50 Day level and 32 over the 200 Day.
Last week, the respective numbers were 21 and 32.
That suggests very little change in that brief period.
However, if we look back just a month, the numbers were 32 and 35.
Also worrying us are the number of BDCs trading within 5% of their 52 Week Low.
In our prior report, we noted this number was 4, consistent with recent periods.
This week, the number in this key category jumped to 7.
(On the other hand, there are still 14 BDCs trading within 5% of their 52 Week Highs, and another 8 between 5%-10% of the top).
We also note there is a slight slippage in the number of BDCs trading at or above book value to 12.
Last week there were 13 in this august category and four weeks ago 14.
We’ve now been in two month narrow channel where the price of BDCS is concerned.
As of this Friday, the sector is down “only” 1.5% from its most recent high so we cannot call an end to the upward trend that began March 1, 2018.
This was a quarter’s end week, which sometimes results in quirky performance as investors tidy up their portfolios.
Moreover, many BDCs have just gone ex-dividend, which can temporarily depress prices.
So we’re not ready to cut and run and call the end of this slow moving BDC rally.
Typically, we need to see a 5% drop from high to low before we designate a rally dead and buried.
We’d been expecting some turbulence along the way – especially in this period between earnings seasons.
Nonetheless, we’re more alert than usual to the possibility that the Good Times may no longer Roll.
Out Of Favor Favorite
We know it’s only one BDC out of forty five, but we can’t help noting that investor favorite Main Street Capital (MAIN) has been dropping in price for 7 weeks.
This week MAIN closed at $38.50, (6.5%) beneath its early August high.
Typically MAIN is at the vanguard of BDC stocks when sentiment is on the rise, so you see why we fret.
Normal Ups And Downs
On the week, there was ordinary individual price volatility.
We only had 2 BDCs trading up 3.0% or more: WHF and TPVG.
In both cases, investor preference had nothing to do with any news.
Neither BDC has had any new filing or press release since September 7, 2018.
Then there were 3 BDCs down by 3.0% or more.
The downsliding leader was ABDC, which reached $6.0 a share and was off (4.4%).
No news there either but we expect – as previously reported – that investors are worrying about credit and earnings.
That’s unlikely to change much till the next earnings release and shareholders get an update on the BDC’s turnaround.
We count 10 Watch List companies out of 32 in the portfolio.
In our internal rating system for potential short term impact on earnings from bad debts, we rate ABDC an F.
However, success or failure will depend on the credit performance of just a few companies, so this could go either way when third quarter 2018 results roll round.
Also down on the week was NEWT by (3.5%).
NEWT was a high flyer earlier in the year, but has been coming down to earth of late and is off (4.0%) over 4 weeks.
Still, with the stock up 25.2% in the last 52 weeks and paying an ever higher dividend, longer term shareholders have nothing to complain about.
As we’ve probably made clear in this week’s commentary, we remain cautiously optimistic that the BDC rally lives on.
As before, we see no catalyst for a major shift to the downside.
That’s especially at a time when BDC dividend staying power is about as strong as it’s been in a long time.
That’s largely due to the extra firepower afforded by the Small Business Credit Availability Act (“SBCAA”).
Even if a BDC stumbles over a loan or two, all those extra assets being booked will allow many players to maintain distributions that otherwise might have been cut.
Yes, that stability might be achieved by taking on more credit risk but investors are not yet in that panicky mood about credit that occasionally sweeps through the non-investment grade space.
In fact, leveraged loan defaults – especially amongst the larger transactions – reached another record low this month.
Of course, the markets look ahead a little ways, but there is nothing on the close horizon causing much in the way of credit flutters.
So – against the weight of the most recent data – we remain optimistic about the short term outlook.
If we prove to be wrong, we’ll be the first to admit our error.
Being stubborn or unrealistic about such things can cause a lot of damage in a BDC sector where prices can drop 20%-30% in a brief period.
However, a (1.5%) sector price drop is not convincing enough to cause us to pack our bags.
We’ll continue to keep readers apprised of our travel plans from week to week.