4/16/2019
Main Street Capital Corp (NYSE: MAIN)
It seems impossible to me that I've never written up MAIN as I previously held an intermediate-term position. I sold out in August of 2018 at $40, but I've generally liked them and have been looking to get back in and regard it as a general error that I didn't get back in during the downturn of 2018 at $33. While HTGC specializes in Tech startups with occasional investments in post startups MAIN simply finances small & midsized businesses, primarily equity to startups and loans to middle market companies.
Price at write-up $38.74
Indexes (30, 180, 365 day)
VIX: 12.55 (13.91, 17.42, 17.59)
TED: 20.4 (22.52, 40.03, 62.3)
S&P500: 2903 (2.72%, 11.18%, 9.25%)
Valuation Ratios
Target: $38.50
Business development companies are strange creatures in that they are required to invest 70% of their assets in private or public U.S. firms with market values of less than $250 million and distribute over 90% of their profits to shareholders. The loans offered by main are from $3m to $20million with most between $5 and $12 million to companies that generally have revenues between $10 and $150 million.
My Thoughts
There's a June Supplemental dividend of $0.25, which should be accounted for in placing orders and might not have been yet by traders. Regular share repurchases will likely keep shares up barring broader market swings as artificial price stabilization.
Last year was a banner year, so that throws off some analysis of the fundamentals - in this case particularly I think the Market is now overvaluing MAIN. However, insiders are primarily only selling small portions of their received stock which as of April has been at $37 while in March they were simply acquiring it at just above $38.
I believe a fair price would be closer to $37.50, though I don't have a strong prediction on what will happen in the next 6-12 months. Additionally, they will be hit by any downturn similarly to the S&P, though historically not as much as the broader market and will recover faster - however since December (4 months) the S&P has recovered more (24% vs 19%) and will likely continue to outpace MAIN through the end of the year making the 6.25% yield moot.
There may be a trend of trying to keep the stock price above $38 by whatever mechanisms are available so any discount will be highly correlated with the market which could also be inferred from the Beta of 1. So, unfortunately, after any downturn, the market will rebound further than MAIN eventually. MAINs happened to outperform during the prolonged recovery 2011-2017.
Main Street Capital Corp (NYSE: MAIN)
It seems impossible to me that I've never written up MAIN as I previously held an intermediate-term position. I sold out in August of 2018 at $40, but I've generally liked them and have been looking to get back in and regard it as a general error that I didn't get back in during the downturn of 2018 at $33. While HTGC specializes in Tech startups with occasional investments in post startups MAIN simply finances small & midsized businesses, primarily equity to startups and loans to middle market companies.
Price at write-up $38.74
Indexes (30, 180, 365 day)
VIX: 12.55 (13.91, 17.42, 17.59)
TED: 20.4 (22.52, 40.03, 62.3)
S&P500: 2903 (2.72%, 11.18%, 9.25%)
Valuation Ratios
| Price/Earnings (TTM) | 14.31x |
| Price/Sales (TTM) | 10.18x |
| Earnings per share | 2.68 |
| Price/Book (MRQ) | 1.59x |
| Price/Cash Flow (TTM) | - |
| Held by institutions | 22.09% |
| Short interest | 4.47% |
| Dividend | 6.25% |
| MarketCap | $2400M |
| Beta | 1 |
Target: $38.50
Business development companies are strange creatures in that they are required to invest 70% of their assets in private or public U.S. firms with market values of less than $250 million and distribute over 90% of their profits to shareholders. The loans offered by main are from $3m to $20million with most between $5 and $12 million to companies that generally have revenues between $10 and $150 million.
My Thoughts
There's a June Supplemental dividend of $0.25, which should be accounted for in placing orders and might not have been yet by traders. Regular share repurchases will likely keep shares up barring broader market swings as artificial price stabilization.
Last year was a banner year, so that throws off some analysis of the fundamentals - in this case particularly I think the Market is now overvaluing MAIN. However, insiders are primarily only selling small portions of their received stock which as of April has been at $37 while in March they were simply acquiring it at just above $38.
I believe a fair price would be closer to $37.50, though I don't have a strong prediction on what will happen in the next 6-12 months. Additionally, they will be hit by any downturn similarly to the S&P, though historically not as much as the broader market and will recover faster - however since December (4 months) the S&P has recovered more (24% vs 19%) and will likely continue to outpace MAIN through the end of the year making the 6.25% yield moot.
There may be a trend of trying to keep the stock price above $38 by whatever mechanisms are available so any discount will be highly correlated with the market which could also be inferred from the Beta of 1. So, unfortunately, after any downturn, the market will rebound further than MAIN eventually. MAINs happened to outperform during the prolonged recovery 2011-2017.
Risks
Invested primarily in U.S. companies subjecting MAIN heavily to any U.S. market or economic decline.
Conclusion
I think the share buybacks are killing it for me here, MAIN's previously high volatility allowed one to buy in at a discount somewhat regularly and without that volatility discount, MAIN has become profoundly less attractive.
So we're only left with consistency and a return that (including the monthly dividend) is about 2% less than a market return compounded yearly. It's not as overvalued as many other companies I've recently looked at which are also offering strong dividends. Previously it offered market returns in share price as well as the monthly dividends in addition to volatility discounts so it was a sure bet, since the S&P left it behind after October of 2017 that suggests money is better put elsewhere.
Net asset value is about $25 per share which we're never likely to see again, $33 would be a best-case scenario and I don't think anyone is predicting it'll go there. If it did, the steady rise in dividend payouts could make it worth it (as a monthly income) except that since there will never be a stock split (as a function of using share issuance as a primary finance vehicle) an investor would never get to a position where he had bought XYZ for a low price and continually received more shares and dividends as XYZ continued to perform well, with MAIN the dividend will grow by pennies a year and the yield to stock price will remain the same while the outstanding shares grow. The relative dividend to purchase price will increase with MAIN but not in the same what that buying MCD at a discount would as the investor and, from this perspective, is essentially being robbed of share price appreciation as MAIN uses share issuance to raise capital as a fundamental part of its business.
Worse, over the next 20 years, I'm not sure small business is where it's at and the board has no intention of changing the model currently. A move from the lower-middle market to the middle and high middle would probably bring me back for a token investment as might a temporary dip to around $33 for the sweet sweet dividends as it returns to the mean (dip & flip) - or better yet a prolonged recovery.
Goodbye old friend, you treated me well from 2011 until 2017. See you after the next meltdown.
Due Diligence - SDY, SPY, AB, O, PSEC
Invested primarily in U.S. companies subjecting MAIN heavily to any U.S. market or economic decline.
Conclusion
I think the share buybacks are killing it for me here, MAIN's previously high volatility allowed one to buy in at a discount somewhat regularly and without that volatility discount, MAIN has become profoundly less attractive.
So we're only left with consistency and a return that (including the monthly dividend) is about 2% less than a market return compounded yearly. It's not as overvalued as many other companies I've recently looked at which are also offering strong dividends. Previously it offered market returns in share price as well as the monthly dividends in addition to volatility discounts so it was a sure bet, since the S&P left it behind after October of 2017 that suggests money is better put elsewhere.
Net asset value is about $25 per share which we're never likely to see again, $33 would be a best-case scenario and I don't think anyone is predicting it'll go there. If it did, the steady rise in dividend payouts could make it worth it (as a monthly income) except that since there will never be a stock split (as a function of using share issuance as a primary finance vehicle) an investor would never get to a position where he had bought XYZ for a low price and continually received more shares and dividends as XYZ continued to perform well, with MAIN the dividend will grow by pennies a year and the yield to stock price will remain the same while the outstanding shares grow. The relative dividend to purchase price will increase with MAIN but not in the same what that buying MCD at a discount would as the investor and, from this perspective, is essentially being robbed of share price appreciation as MAIN uses share issuance to raise capital as a fundamental part of its business.
Worse, over the next 20 years, I'm not sure small business is where it's at and the board has no intention of changing the model currently. A move from the lower-middle market to the middle and high middle would probably bring me back for a token investment as might a temporary dip to around $33 for the sweet sweet dividends as it returns to the mean (dip & flip) - or better yet a prolonged recovery.
Goodbye old friend, you treated me well from 2011 until 2017. See you after the next meltdown.
Due Diligence - SDY, SPY, AB, O, PSEC
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