3 Reasons to Sell Main Street Capital

If you follow the financial sector as I do, you tend to identify certain banks and financial companies that you keep an eye on. Investors scouring the financials for income tend to focus on REITs of various types, especially mega-yielding mREITs like Annaly Capital (NYSE: NLY  ) .

But there is another small but growing segment in the financial services industry that merits attention. Business development companies, or BDCs, are publicly traded private equity firms that invest in companies at various stages of development, providing much needed capital for stakes in the company. I personally own shares in Main Street Capital (NYSE: MAIN  ) , and I recently provided three reasons to buy the Texas-based BDC. Today, I'll put on my bear hat and provide three reasons why you should consider selling shares if you currently own them.

1. The fiscal cliff
It's all over the news. We have an updated farm of articles to keep our readers abreast of what is happening with the negotiations between House Republicans and President Obama. How could these talks affect Main Street Capital adversely?

Since Main Street provides equity capital to "lower middle market companies ," any resulting change in the tax code from a fiscal cliff agreement -- or the lack of agreement that takes us over the cliff -- could affect the performance of these companies. If the companies begin to falter, thus affecting incomes, the return on Main Street's investments could be affected and drastically impact the performance of the company in the short term.

Uncertainty is never good for the market, and a lack of a plan to solve the "fiscal cliff" currently makes for a lot of uncertainty. If you personally think that this problem won't be solved, or will be solved in a way that will affect how successful businesses are going forward, you might consider selling your shares in Main Street Capital.

2. Potential better options
Depending on what metrics you look at, Main Street capital isn't the best at what it does. There are a few other BDCs that could be perceived as better values based on certain criteria:

Company

P/E Ratio

P/B Ratio

Dividend Yield

Recent Price

Main Street Capital

8.1

1.65

6.2%

$28.90

Apollo Investment Corporation (NASDAQ: AINV  )

7.3

0.98

9.7%

$8.26

Solar Capital Limited (NASDAQ: SLRC  )

5.8

1.01

10.5%

$22.88

Prospect Capital (NASDAQ: PSEC  )

6.1

0.99

11.4%

$10.73

Source: Finviz.com.

On the surface, all three of these companies appear to be better values than Main Street, and might be worth it to take a second look at them. For every share of Main Street Capital that you own, you could swap it for almost four shares of Apollo Investment, nearly three shares of Prospect Capital, and a share of Solar Capital, giving you more bang for your buck. All these investments would result in a higher yield, and all are trading pretty close to book value. You would be sacrificing the monthly dividend of Main Street, unless you're reinvesting into Prospect Capital, but the higher yields would more than make up for it. I'm personally sticking with Main Street, but the others present impressive value cases.

3. It's diluting your value
Earlier this week , Main Street announced a public offering of 2.5 million shares, which are to be priced at $28. Though the money raised from the offering is going to be used to pay off some debt, which is usually a good thing, it will also dilute the value of the shares currently in the market. For example, at the end of its last quarter, the company had about 31.6 million  shares outstanding, resulting in earnings per share of $1.01. If we use the same income numbers, but increase the shares outstanding to reflect the new amount after the public offering, EPS declines to $0.94. While not a dramatic decrease, lower net incomes and EPS could lead to a reduction in future dividends.

Don't take my word for it
While I like to think that I have the power to move markets, I'm no Warren Buffett. It goes without saying that these three reasons should not be the only reasons that you sell -- or avoid -- Main Street Capital as an investment. I do hope that they are a good starting point as you dig deeper into your research on the company.

Another option if you are looking to redistribute your Main Street Capital funds is Annaly Capital Management, which has a history of paying huge dividends to shareholders. But there are some crucial issues investors have to understand about Annaly's business model before buying the stock. In this brand new premium research report on the company, our analyst runs through these absolute must know topics, as well as the future opportunities and pitfalls of their strategy. Click here now to claim your copy.

 


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On December 13, 2012, at 11:32 AM, EnigmaDude wrote:

    Interesting thoughts. I recently sold my shares of AINV and just bought shares of MAIN. If you compare the 2-year chart for each stock, you will see why I did!

  • Report this Comment On December 13, 2012, at 12:08 PM, 0b1knob wrote:

    "It's diluting your value"!!!!!!!!!

    MAIN is one of the few business development companies strong enough to sell stock at over its NAV. Such stock placements instantly increase the NAV of current holders. The other BDCs on your list repeatedly sell stock at less than NAV.

    Any dilution of earnings is short lived as long as MAIN can put the money to work, which they have always been able to do.

  • Report this Comment On December 13, 2012, at 12:13 PM, XMFTheGuruEbby wrote:

    Thanks both for your comments. As I mentioned, I am a proud shareholder of MAIN and plan on being for some time. I was simply providing some of the bear cases that may be out there for what I feel is a great company.

    Thanks for reading!

    Robert

  • Report this Comment On December 13, 2012, at 8:35 PM, ajstudebaker wrote:

    I second what 0b1knob wrote. MAIN's ability to sell additional stock above book value as a plus, in my view.

    It will be interesting to see how the stock behaves as the impact of the sale of shares at $28 fades.

    Full disclosure: long MAIN

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