Solar Capital: Tomorrow's Monster Stock
Jan 8th 2013 3:56PM
Updated Jan 8th 2013 4:00PM
Stocks climbing to 10 times their original price are rare breeds -- but they're not impossible to find. Especially when you have Fools for friends.
The market's best stocks include companies that have risen dozens of times in value by taking advantage of the market's weaknesses. These aren't penny stocks; they're viable companies with sound business prospects that are achieving phenomenal returns. Finding just one or two of these monstrously successful firms can help you establish a winning portfolio.
Stalking the monster
To find tomorrow's winners, we've enlisted the help of the monster trackers at Motley Fool CAPS, the 180,000 member-driven investor community where informed opinion is translated into stock ratings of one to five stars. We'll be peering in on the picks of those who have successfully chosen stocks that doubled, tripled, or even quadrupled in price, and this week All-Star member GyroDynasty gives us Solar Capital as his next monster pick. He made his mark with The Zweig Fund , which rose over 450% after he picked it to outperform the indexes, compared to the S&P 500's 42% increase.
Of course, you shouldn't jump into the breach just because an All-Star stock picker did. Just consider this as a starting point for your own research of extreme buying opportunities.
Debt and equity
Despite its name, Solar Capital is not an alternative-energy financing firm, but rather a business-development company that targets a broad range of leveraged companies across all industries, but primarily seeks out investments in the food, beverages, and tobacco field. Surprisingly, energy -- mainstream or alternative -- is one sector it hasn't invested in.
BDCs look for tomorrow's emerging growth stock stories today providing debt financing to businesses starved for cash or who are unable to obtain it through traditional means. Since capital is still scarce for small to mid-sized businesses, Solar Capital ought to continue generating healthy returns on its investments.
Like most BDCs, they pair debt or debt-like instruments with an equity stake in a growing company, and just as REITs pass on to shareholders 90% of their taxable income, BDCs offer a similar tax architecture. Because they're structured as regulated investment companies, they can often offer a substantial dividend yield. Solar Capital currently yields 9.6%, Apollo Investment offers a 9.3% yield, and Ares Capital yields 8.6%. But volatile markets can wreak havoc with such small companies, and American Capital almost went under when financial markets collapsed and it defaulted on its loans. While it suspended its dividend in 2008, its stock has done quite well, and last year it soared 77% as business conditions improved. Solar Capital rose 20% by way of comparison.
Although chasing yield can be a dangerous game, it seems near unanimous that everyone believes Solar Capital will continue its strong performance. Only one of the 94 CAPS members that have weighed in on the BDC think it will underperform the market indexes, while all seven of the Wall Street analysts CAPS tracks that are venturing an opinion on it agree.
Revving their engines
With its stock at new highs and its buying up a rival investment house, Solar Capital figured it was time to tap the equity markets for some financing and priced an equity offering at $24.40 a share in a bid to raise $146 million . While that's pared some of its recent gains, it ought to be able to achieve its goals going forward.
What investors need to watch for is the crowding occurring in the space. There are dozens of BDCs out their pursuing many of the same opportunities, which could cause prices to rise and profits to be more limited. Aside from the larger names in BDCs like Apollo, Ares, and Main Street Capital , there's been an explosion of IPOs including TCP Capital , WhiteHorse Financial , Monroe Capital , and more. It's a trend that's expected to continue in 2013.
While it is possible more money chasing more companies could raise the stakes, Solar Capital seems especially well-financed to capitalize on the opportunity. With a solid stable of companies in its portfolio, a healthy dividend offering an attractive yield, and banks willing to lend money to BDCs to help them fulfill their role, I think it's got a bright future -- one with or without solar stocks to its name.
A chance for scary growth
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The article Solar Capital: Tomorrow's Monster Stock originally appeared on Fool.com.Rich Duprey 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.
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