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Few Buys in Global Markets After Rallies

Source: Adrian Day


September 2, 2016 ( Newswire) Money manager Adrian Day provides an update of his non-resource holdings and his interpretation of the Federal Reserve's activities.

All of the Business Development Companies have moved up strongly in recent months from their grossly oversold year-end levels, in line with many other "dividend" plays, such as utilities. In general, we are holding, given the still-high yields and improvements at the companies, but not buying given the strong recent stock movement as well as yields that are coming down to historical norms.

Dividends still in high single digits
American Capital Ltd. (ACAS:NASDAQ) continues to report strong operations, with operating income up and strong originations. The company also continues to repurchase shares, about 11.5 million in the latest quarter. With the rally in the share price, the discount to the purchase offer from Ares has narrowed; we now call ACAS a "hold."

Ares Capital Corp. (ARCC:NASDAQ) continues to deploy capital, as well as raise funds for managed funds (such as a $510 million CLO and a new $2.5 billion European fund); Ares earns fees from managing these funds. Ares continues to perform well, and is making up for the loss of the GE Capital joint venture. Though there could be some stock volatility when the merger with ACAS is completed, the merger will be accretive for Ares with the possibility of extracting more value from some of ACAS's assets. With a covered yield of 9.5%, we are holding, despite the strong stock movement from under $14 in mid-July.

Equity raise risk?
Gladstone Capital Corp. (GLAD:NASDAQ) continues to experience net asset growth, with new originations exceeding ongoing high repayments of existing loans. NAV per share rose 3 cents. Net investment income fell slightly for the quarter, but still covers the dividend. The company also used a small part of its buyback authorization, spending $288,000 to buy shares at $6.95 each. With debt a reasonable 72% of equity, the company has meaningful dry powder, but with the shares trading above book value again, it is possible that the company decides to use the opportunity to raise more equity. We don't think there is a rush to raise equity, but it's a risk. Following the strong rally in the stock price, from under $7 in June, the stock is now yielding 9.8%. We are holding.

Gladstone Investment Corp. (GAIN: NASDAQ) also continues to perform well, as a company and a stock, with perhaps stronger recent results than its sister company. New investments are up, and net investment income rose, well above analyst's expectations, as did NAV per share. Although trading now at 93% of book-above its five-year median-we suspect there will not be a near-term need for new capital because of pending asset sales. With the rise in the share price, from under $7 in June, the yield has dropped to 8.2%, towards the low end in the current BDC market, but more-than covered by income (suggesting a possible dividend increase in the future). We are holding.

Two core holdings with steady long-term growth
Nestle SA (NESN:VX; NSRGY:OTC) has long been a core holding for us. Though the food industry is highly competitive, with low margins, and facing several headwinds (including the ongoing move away from processed foods, and, for Nestle, the strong Swiss franc), Nestle is a 150-year-old blue-chip company, with a solid balance sheet and innovative practices. It has made a major R&D move into food medicines, foods designed for specific health issues, everything from high blood pressure to rare diseases. Such products will require a doctor's prescription, and are a separate segment than the drive to emphasis more healthful snacks and food products. We have discussed previously the improved "Lean Cuisine" dinners with, not only improved flavor, but reduced sodium. With its strong balance sheet-debt-to-EBITDA of only 1x-Nestle has just completed a Sfr 8 billion buyback program. We are holding.

Loews Corp. (L:NYSE) is another solid, long-term holding. It has a super-strong balance sheet. Its CNA insurance unit, the branded hotels, and the pipeline business are performing well. Diamond Offshore, the offshore oil drilling unit, continues to earn on its long-term contracts, is well capitalized, and is well positioned to take advantage of the ongoing weakness in drilling. Several impairments in the latest quarter, however, took Loews to a net loss of 19 cents per share. With $3.1 billion net cash, Loews has also had ongoing share repurchase programs, though it tends to be opportunistic and this year has bought back fewer shares than last year. Trading at a 22% discount to book value, Loews remains a solid long-term holding.

Holding two Singapore stocks
Hutchison Port Holdings Trust (HPHT:Singapore) continues to see sluggish volumes on weak trade, particularly China-Europe. The impact of a strong cost-cutting program which mitigated the impact of lower revenues on the bottom line will moderate going forward. The 9.6% yield supports the stock but the dividend will have to come down without a pickup in throughput. Given the yield, as well as the discount to book, we are holding, but it's a somewhat weak hold.

Kingsmen Creatives Ltd. (5MZ:SI) continues to perform well in its core businesses. The stock has slowly appreciated from May, trading at a single-digit p/e and yielding 4.4% (following lower dividend over the past year). The balance sheet and the return ratios remain solid. We are holding, but would buy again on a pick-up in revenues (or a lower price).

Slouching Towards Bethlehem
Other than pimpled Johnnie approaching the high school prom queen for a dance back in 1957, has anyone ever done anything more hesitatingly than has the in Fed raising rates? There's more talk from Yellen, but it is clear the Fed as a group, and Yellen in particular, remains very cautious and seemingly wants ideal conditions before raising rates. Those ideal conditions never appear, and there is always some excuse not to raise rates, be it the stock market, China, or Brexit. A rearguard action is being undertaken by vice chairman Stanley Fischer, publicly calling for higher rates and "interpreting" Yellen's comments hawkishly. The Fed will likely raise rates again this year, just as last year, to save face if for no other reason, and Fischer is trying to make it impossible for them not to do so.

But one quarter-point increase does not take away from the fact that policy remains excessively easy and rates excessively low. Stocks-and real estate-remain the only games in town for many investors, and that alone will likely support stocks, which are likely to continue in this see-saw action within a narrow range for a little longer.

It also means the bull case for gold remains intact. There was panic last Wednesday after a large one-day drop with gold breaking below its 50-day moving average. It was the largest one-day drop since…early August; and the first break of the 50-day MA since. . .late May. In other words, we've seen such movement before so we are not overly concerned.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."


1) Adrian Day: I, or members of my immediate household or family, owns shares of the following companies mentioned in this article: American Capital, Nestle and Gladstone Investment. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this interview: American Capital, Ares Capital, Gladstone Capital, Gladstone Investment, Nestle, Loews, Hutchison Port Holdings Trust and Kingsmen Creative. I determined which companies would be included in this article based on my research and understanding of the sector.
2) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
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