Is Main Street Capital Corporation a Buy Right Now?

Here's why Main Street Capital shares look appealing after a secondary offering.

Apr 10, 2014 at 1:33PM

Main Street Capital Corporation (NYSE:MAIN) has emerged as one of the best players in the BDC industry, outperforming its peers and delivering spectacular returns over time.

But now its wants to grow, and to do so, it's enlisting the help of bankers to sell 4 million new shares at $31.50 each. The announcement led to an immediate 5% decline in the share price.

And though 5% is hardly the difference between good and great valuation, a 5% discount is equal to about three quarters' dividends. Furthermore, Main Street Capital now trades at 1.41 times book value including proceeds from the offering, a price not seen since 2011.

MAIN Price to Book Value Chart

Why Main Street Capital looks cheap right now
Main Street Capital certainly trades well above its peers at 1.4 times book value, but for good reason: Its asset yields are unmatched.

In the lower middle market, where it makes debt and equity investments in the smallest of private companies, it earns impressive 14.7% yields from a portfolio constructed of first-lien debt investments. Its true middle market portfolio yields 7.8%.

Yields in the true middle market have plunged. One BDC, THL Credit (NASDAQ:TCRD), has seen its yields plunge quarter after quarter. Plunging asset yields put its dividend at risk

This hasn't been the case at Main Street Capital, where yield compression has been modest, and thus far, temporary. The company's lower middle market debt portfolio yielded 14.8% in 2011, and 14.2% in 2012, compared to 14.7% at the end of 2013.

Banking on tiny companies
For as long as the lower middle market can be a gold mine for Main Street Capital, its shares should trade well above book value. The lower middle market is less efficient, and multiples are lower. Thus, Main Street Capital not only finances lower-leveraged businesses, it also buys equity stakes at lower multiples than other BDCs pay in the "true" middle market.

The latest presentation says a typical entry multiple is 4.5-5.5 times EBITDA, significantly lower than multiples for larger middle market buyouts. CapitalIQ data places the median middle market buyout at 8x EBITDA, funded with a combination of 61% debt, and 39% equity. It's pretty easy to see a difference in valuation. Bigger companies are pricier, and more highly levered.

When I look at Main Street Capital, I see a portfolio of very inexpensive, private businesses. The debt investments provide current income in the form of a robust dividend yield, but its equity stakes in lower middle market companies are the real kicker.

Main Street typically owns 33% of the equity in its lower middle market portfolio, giving investors huge upside potential as its debt investments are repaid and its lower middle market companies "grow up."

Over long periods of time, I can't help but think a combination of lower entry valuations and higher debt yields should make Main Street Capital a great buy at this price. The 7.8% current dividend yield is especially appetizing.

Are these dividend stocks better than BDCs?
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Jordan Wathen has no position in any stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers