Why Shares of Prospect Capital Corporation Are Down 2% in 2014

Prospect Capital Corporation's (NASDAQ: PSEC  ) shareholders have had quite a roller coaster ride so far in 2014. From the shares being removed from S&P and Russell indices to battles with the SEC over accounting procedures, this year have been a challenging time for Prospect and other business development companies (BDCs) in general.

In fact, Prospect's total return for the year is -2%, which means even after the excellent dividends paid out, investors are still in the red for 2014. Will the decline continue, or is this an opportunity to get in cheap?

PSEC Total Return Price Chart

Three main reasons for the decline
First, the S&P and Russell indices decided in March to remove BDCs from their indices, which created a ton of selling pressure on the companies.

Index funds which have held shares of Prospect are now forced to sell those shares, and simple supply and demand tells us an excess of sellers creates downside pressure. The index rebalancing is expected to be completed by the end of June, so this won't be a concern for much longer.

SEC drama
Next, Prospect announced during its last earnings release it had been in talks with the SEC about the possible need to consolidate some of its holding companies for accounting purposes. This caused lots of speculation about how it could affect the company's past and future earnings, as well as Prospect's ability to maintain its dividend.

Even though Prospect reassured shareholders in a press release that there would be no negative effects to the company's taxable income regardless of the outcome, it didn't stop at least five law firms from threatening class action suits against the company for "misleading investors" and "misrepresenting" financial data.

While these lawsuits likely wouldn't have had much merit regardless, the wind was really taken out of their sails when the SEC decided no changes to Prospect's past financial results would be necessary.

Higher use of credit
In between the index removal and SEC issues, Prospect announced two separate increases in its credit line usage, bringing the total to $857.8 million of the $1 billion revolving credit facility.

Some investors might be nervous that Prospect's credit line is nearly "maxed out", but I actually have the opposite opinion. What Prospect is good at is borrowing money and lending it out at a higher rate. More borrowing just lets the company do more of what it does best.

Prospect's "discount" and what we can expect going forward
The critical number to watch here is $10.68. That is Prospect's net asset value, so as long as it trades below that price, you can actually buy shares of Prospect for less than the underlying assets are worth. Prospect usually trades for between 1.025 and 1.125 times its net asset value, so at the current price Prospect looks like a steal.

And, while you wait for the share price to rebound you'll be paid a dividend yield of nearly 13% while you wait.

Is this a better investment than Prospect?
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.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 25, 2014, at 12:58 PM, Dividends678 wrote:

    The article below goes above and beyond the typical summarized articles. IMO high quality.

  • Report this Comment On June 25, 2014, at 1:10 PM, postnasaldrip wrote:

    Based on the 2/28 S&P reconstitution, the Russell change will be a non-event. In Feb., 43 million shares were traded on the "end date" and the share price rose .02 for the day. As you stated, the lawsuits will be gone when the ads stop (most already have) and the SEC issue was resolved with advantages to both sides.

    You are correct. PSEC share price currently is a steal with a 13+% yield, already declared out to the end of the year. What's not to like?

  • Report this Comment On June 25, 2014, at 3:02 PM, shiftsuper wrote:

    Total return?

    That "total return" includes the did not include it in your calculation.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3005732, ~/Articles/ArticleHandler.aspx, 9/1/2015 4:18:51 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

Today's Market

updated 7 hours ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:00 PM
PSEC $7.60 Down -0.11 -1.43%
Prospect Capital C… CAPS Rating: ****