Prospect Capital (NASDAQ:PSEC) has a vigorously managed portfolio of lending activities that necessitates constant adjustment, new deals, review of thousands of potential opportunities, and tough decision making. While investing is a personal decision, all things considered, for our risk tolerance, we believe a strong entry point into the name has always been when the stock yields over 11%. With the monthly distribution having been cut significantly to $0.06, our target entry point is now $6.50, where the name will yield 11% again.
Between an 11-12% yield has always been our target with the name over the years. We believe the reward at these levels justifies the risk taken on with Prospect Capital’s business model. Ultimately, the risk is whether the distribution will be covered. To ensure the dividend is able to be maintained, one key piece of evidence that has been missing from recent analyses is a deeper understanding of recent investment activity trends and implications going forward. We seek to fill some of that void in the present column.
The ‘black box’ of collateralized loan obligations
Simply put, the quality of the investments made determines the possible rate of return. One fundamental weakness and risk factor of Prospect Capital in our opinion is collateralized loan obligations or the CLO portfolio. One of the risks of the CLO portfolio stems from the fact that there are 1,000s of loans in it, and even when digging into recent press releases, SEC filings and presentations, which is all research we conducted for the present piece, the amount of work to quantify exactly what is being invested in and out of in this section of the portfolio would require months of work and is more suited for an academic thesis. That said, while the investments are summarized in massive tables across 10-Q filings, by the time you………READ ENTIRE COLUMN