As a recent retiree now entering the “cumulation phase” of my investing life, I want to earn high-yielding income from stocks like BDCs, as I have written before. I recently looked at a BDC that I added to my income calculator. portfolio in September, when I covered Crescent Capital (PCCC) – Crescent Capital: Joining the ranks of high-yielding BDCs in my portfolio (NASDAQ:PCCC) | In search of Alpha.
Recently, a number of articles have been published on other Popular BDCs like Ares Capital (ARCC), FS KKR Capital (FSK), Blackstone Loans (BXSL), Main Street Capital (MAIN) and Blue Owl Capital (OBDC), which are the five largest in terms of market capitalization.
As the end of the year approaches, I wanted to examine the performance of all publicly traded BDCs in the BDC universe and more specifically, the those with a market cap of over $100 million with better performance expected from larger BDCs (as measured by market cap). However, this has not proven to be the case, at least in 2023, as the table below shows. For example, ARCC is not even in the top 20. MAIN, due to its very high premium, above 54%, is in the top 20 but risks (in my opinion) a drastic price drop every time the next market correction occurs. .
In my opinion, BDCs that have performed well this year, but still trade at a substantial discount to NAV, represent the best ones to consider in 2024 if we see a market correction and better pricing. ‘entrance. Of course, credit quality is a factor to consider, and some believe discounts represent higher credit risk in these BDCs’ portfolios. This is indeed an element to take into account before making any investment decision.
Top 20 BDCs with market cap > $100 million ranked by total return price in 2023. Those with market cap over $500 million and trading at a discount to NAV (as of 9/30/ 23) are highlighted in yellow.
In my personal portfolio, I currently hold TRIN (which trades at a slight premium and I wrote approximately in March), CCAP, CION (which I suggested in April should outperform in 2023), FSK (which I also examined in March) and RWAY on this list. I haven’t done an in-depth review of RWAY yet, but there have been at least 6 recent buy recommendations from other SA analysts.
I had previously held CSWC and ARCC, but sold them as premiums increased, believing that discounts to the others would diminish as the outperformance continued. I was probably wrong to sell CSWC, but again, given that I believe a market correction is likely in the first quarter of 2024, there is a good chance there is an opportunity to start a new position at a much better price.
The 1-year total return performance, as shown in the SA chart tool, shows that only MAIN performed slightly better than RWAY, but the other 4 BDCs I own all performed better than MAIN and ARCC this year (as of 12/28/23).
While researching this article, I also observed that Bain Capital Specialty Finance (BCSF) also trades at a -13% discount, has a market cap of $985 million, yields above 11%, and is a top 10 outperformer of 2023. Several South African analysts have rated BCSF a buy over the last few months. I’m not very familiar with this BDC, so if anyone has more to add, please comment below.
Another stock I don’t currently own that’s in the top 20 and trading at a -9% discount is MidCap Financial (CMF). MFIC yields 11% and has a market cap of around $900 million. Recently in the news due to waiting merger with two CEFs – AIF and AFT, the MFIC should be a candidate to consider to outperform in 2024. According to the press release:
The combined company will have approximately $3.4 billion in total investments and $1.4 billion in net assets
Under the terms of the merger agreements, MFIC will be the surviving entity and will continue to operate as BDC and trade on the NASDAQ Global Select Exchange under the symbol “MFIC.” MFIC’s investment strategy will continue to focus on variable rate senior loans to middle market businesses, primarily from MidCap Financial, a leading middle market lender.
The best time to buy MFIC this year was in March, when the price fell, along with many other BDCs, as the price chart shows.
If you are a more conservative investor and think the credit markets will see more defaults next year, then ARCC and MAIN might be more your cup of tea with their longer history, larger market capitalization, and credit quality superior. I’m also more interested in the income generated by BDCs than capital appreciation, and these two BDCs also have a lower yield than the one I own, which is another factor to consider.
Hercules Capital (HTGC). However, HTGC is also trading at a very high premium of over 54% (like MAIN), which could lead to a sharp price decline in the event of a market correction. Currently, HTGC has mixed reviews with several buy recommendations and a few hold recommendations from other SA analysts. I like HTGC and even wrote a buy recommendation in January 2022. But the venture capital market dried up in 2022 and the first half of 2023, which seriously impacted HTGC’s performance until things started to improve in november. HTGC price action has mostly followed the broader market since January 2022, as shown in this price chart during this period.
Like CSWC, I would put HTGC on my watch list in case of a significant price decline during a market correction. But I wouldn’t recommend starting a new position now, given the sharp price rise over the past couple of months. There are other factors to consider, such as the credit quality of the portfolios and the target markets that each BDC addresses as well as leverage and debt levels. You should also consider your own investment objectives, such as income versus capital appreciation and the level of risk you are willing to accept. In general, the higher the risk, the higher the reward, but also the higher the downside risk in the event of a sudden downturn in the economy.
In this article I try to explain my rationale for the BDCs I currently invest in and which ones I would put on my watchlist to add if there is another opportunity like the one we had in March after bank failures. . This was a good time to add several BDC positions, as the prices of almost all of these stocks fell, along with other financial stocks, due to banking fears. But the prospects for many of these BDCs have improved in the wake of the banking crisis, as they have taken over.
This article is not an attempt to identify the “best” BDCs for the future, but rather is a review of their performance over the past year. Past performance is no guarantee of future results, but it can be used to help weed out those worth monitoring. Based on this review, I will add BCSF and MFIC to my personal list for further consideration and may decide to open positions in one or both. I may also add CSWC and/or HTGC to my portfolio if we get a good opportunity due to a broader market correction or other banking scare. I appreciate your comments below.