Fifth Street Finance Shares Plunged: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Do you love roller coasters? Then you're going to love Fifth Street Finance (NYSE: FSC  ) . This business development company dropped 16% in early trading this morning, perhaps prompted by doubtful words from the Oracle of Not-Omaha, Jim Cramer.

So what: Last night on Mad Money, Cramer worried aloud over Fifth Street's ability to finance its monster 11% dividend yield. This morning, the worry turned contagious. Granted, after the plunge investors came to their senses and began buying the stock again, reducing Fifth Street's loss to just 2% at last count -- but not before a whole lot of damage was done to investor portfolios.

Now what: Was the damage deserved? I'm not so sure it was. If it's the company's dividend payout ratio of 188% that worries Cramer, well, Fifth Street could easily cut that payout in half, and still pay out a 5.7% divvy. Tack that onto the company's 7.6% growth rate and P/E of 15.6, and you're pretty close to a fair price on this stock.

Long story short, I'm not personally going to run out and buy Fifth Street at today's prices. But I'm not convinced it's a great short idea either.

Want a graduate level course in Fifth Street Finance? Add it to your Fool Watchlist.

Fool contributor Rich Smith does not own (or short) shares of any company named above. The Motley Fool has a disclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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Rich Smith

I love things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.

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