Ares Capital Corporation an “August Opportunity,” Says Analyst
Business Development Company Now Yields Almost 10%
Business might be slow in August as many people take their vacations. But according to a Wall Street investment bank, there is an “August Opportunity” for income investors.
In a note to investors, Keef, Bruyette & Woods analyst Ryan Lynch said that Ares Capital Corporation (NASDAQ:ARCC) stock should be a core holdings. (Source: “KBW: Ares Capital Is an August Opportunity,” Barron’s, August 23, 2016.)
Ares Capital Corporation is a business development company (BDC) that provides debt and equity financing to middle market companies, venture capital backed businesses, and power generation projects in the U.S. As of the end of March 2016, Ares Capital is the largest BDC by total assets and market capitalization.
The U.S. Congress created BDCs in 1980 to help raise funds for startup businesses and boost employment growth. BDCs are different from venture capital companies in that they allow smaller, non-accredited investors to invest in emerging companies.
The analyst has an “outperform” rating on Ares Capital with a price target of $17.50. This represents a seven percent potential upside from the stock’s current level. At today’s price, Ares Capital now yields 9.54%.
Lynch wrote that Ares Capital’s solid credit quality, high return on equity (ROE), and a compelling valuation make it a core holding. Moreover, the BDC could also benefit from its planned acquisition of American Capital Ltd. (NASDAQ:ACAS).
When it comes to valuation, the analyst pointed out that Ares Capital is trading at a 14% discount compared to its peers on a price-to-book ratio metric and at a six-percent discount on a price-to-earnings metric.
“Not only is ARCC trading at a discount to its peers, they are also trading at a discounted valuation relative to where they have historically traded from both P/B and P/E metrics,” he wrote. “To summarize, ARCC’s valuation looks compelling both compared peers and compared to their own historical valuation multiples.” (Source: Ibid.)
His conclusion: “ARCC’s excellent credit underwriting has allowed them to generate one of the highest ROEs in the group but the market is currently valuing their stock at a discount.”
Dear Reader: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. We are 100% independent in that we are not affiliated with any bank or brokerage house. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose. The opinions in this content are just that, opinions of the authors. We are a publishing company and the opinions, comments, stories, reports, advertisements and articles we publish are for informational and educational purposes only; nothing herein should be considered personalized investment advice. Before you make any investment, check with your investment professional (advisor). We urge our readers to review the financial statements and prospectus of any company they are interested in. We are not responsible for any damages or losses arising from the use of any information herein. Past performance is not a guarantee of future results. All registered trademarks are the property of their respective owners
Sign up to receive our FREE Income Investors newsletter along with our special offers and get our FREE report:
5 Dividend Stocks to Own Forever
This is an entirely free service. No credit card required. You can opt-out at anytime.
We hate spam as much as you do.