It has been a rough few months for Prospect Capital Corporation's (NASDAQ:PSEC) shareholders.
First, the company was removed from S&P and Russell indices, creating tremendous selling pressure on the stock. Then, the company announced it may have to change its financial reports due to the SEC claiming it misclassified some of its investments. Finally, at least five lawyers were threatening class action lawsuits on behalf of investors, alleging Prospect deliberately misstated its past financial results.
Well, in the past few weeks it has been announced the SEC will not make Prospect change anything on its previous financial results, which pretty much took all the wind out of the lawyers' sails. The selling pressure from the index removal is still there, but doesn't have much of anything to do with the long-term value of the business.
What this means is that Prospect is still trading at a discount, but without the risk of legal issues, and there is reason to believe the company agrees.
Big insider buys
Prospect's CEO John F. Barry purchased 200,000 shares of Prospect in two separate transactions on June 12 and 13 at an average cost of $10.34, or over two million dollars in all. This is added to the massive stake the CEO already owns, bringing the total to more than 4.1 million shares.
Three other Prospect officers and directors also made insider buys on those dates, ranging from 1,000 to 30,000 shares.
Perhaps the most interesting fact to note is that over the past two years, there have been 20 separate insider transactions reported to the SEC, and not one of them was a sale or reduction in ownership. All 20 were purchases.This shows tremendous faith in the company by the management, and all of the recent buys tell us the insiders feel the shares are cheap as well.
What Prospect is really "worth"
As of the most recent quarter, Prospect's net asset value is $10.68, meaning the company actually trades for about 3.5% less than the value of its investment portfolio. This is the number to keep an eye on, because it defines in the most basic sense when we can buy Prospect at a "discount."
As you can see from the chart, Prospect generally is priced at between 1.025 and 1.125 times its tangible book value, which implies a target price range between $10.95 and $12.00 per share. So, for any price below $11 Prospect looks pretty cheap.
Great income with upside
Prospect is an excellent buy right now, not just for its excellent 13% dividend which is paid monthly, but it also trades for a significant discount to the value of its assets.
Once all of the index fund selling is completed (supposedly by July) and the market realizes Prospect will be able to continue to pay its dividend as it has been, we could easily see significant upside in the share price as well.
Prospect has declared its dividends through December, and it has increased its dividend for 54 consecutive months, so there is no reason to believe the streak is going to end anytime soon.
Matthew Frankel owns shares of Prospect Capital. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.