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Fifth Street Finance Corp. (FSC)


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4.17+0.04 (+0.97%)
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  • Something not good is up - anyone have any facts on why price is down so much today?
  • This is William Packers opinion:
    The Devastating Destruction Of All Things Medley And Fifth Street

    May 25, 2017 7:41 PM ET|Includes: Fifth Street Asset Management (FSAM), FSC, FSFR, MCC, MDLY
    So here we are again. Medley capital stock (NYSE:MCC), and Fifth Street Finance are trading back down to their historic lows. However, so are the management companies behind them. Both Medley Management (NYSE:MDLY) and Fifth Street (NASDAQ:FSAM) have suffered nearly 70% losses or more since IPO. Anything with the Medley or Fifth Street logo attached to it has become a poster child for poor performance and high expenses/fees. This has resulted in the stocks performing much worse than their peers.

    Its hard, because as value investors we always try find value and take that value as an opportunity for investment. Unfortunately, it doesnt always work out that way and we get trapped into a free-fall and we try to dig ourselves out. Some of us do this by selling and moving on to the next best investment idea, others do this by trading the security over and over to average down, and others put even more capital in to average down in the hopes that eventually the stock price will go up and they can get out of it without a loss. So many of us "value investors" have had our share of losses over the years that we had to make up for. I have personally fought so hard to stay in the black since 2014. I never thought it would be this hard or that loan losses at many externally-managed BDCs would be this high in a fairly benign credit environment.

    But for the two externally-managed BDCs, Fifth Street Finance (NYSE:FSC) and Medley Capital corp, and that is exactly what happened and its left investors wondering when it will finally be a good time to buy. I can't tell you that answer, but I can help you to understand why now is a better time to buy than ever before. First, changes are coming to our sector. Externally-managed BDCs are no longer held up by institutional or retail investors. That means the model no longer supports growth as they trade well below NAV (at least many of them still do). Something has to give, and whats standing in their way is the external managers themselves. The model simply does not work when you charge nearly 2% on total assets (which is a 4% management fee on our capital if they use 1:1 leverage including capital invested via SBIC) and they also charge you their incentive fee which is around 20% of all net investment income! The net result is that nearly 50% of cashflows, and i am talking cashflows here not profits after loan charge offs, flow back to the management company. So who really owns the company? Is it the shareholders or the external management? Certainly it is the shareholders who are suffering the direct losses while the management team syphons off as much money as it can over the lifetime of the BDC. The external managers, MDLY and FSAM, have been trying to throw a bone to investors as loan losses have piled on. They are only compromising as much as they have to and not as much as they should. They have to compromise as they face losing their asset management contracts during a time when white knight activist investors are on the rise in the publicly-traded BDC industry. FSAM has already fought off one activist in early 2015. This is all too little too late though, as investors have caught on to the deception and the inability for these asset managers to produce profits for their investors. The goose has already been cooked. Now that their BDC share prices are approaching 50% of NAV, and investors still not really interested, the situation has presented itself for new activist investors and others interested making money by winding down the BDCs to come forward and take away the keys of the kingdom from the external managers. I recommend that investors keep these two BDCs on their watchlist for any news of another activist push or sale of either externally-managed asset manager. However, its much more likely FSAM would be sold than MDLY as MDLY is a diversified asset management platform with less permanent capital than FSAM. FSAM also just mentioned on their conference call that they are downsizing their business. That means they are selling or winding down various pieces of their asset management business. Two pieces brought up on the FSAM call were the CLO business and the hedge fund. They are trying to find buyers for the CLO business and they are closing down the hedge fund. This is the beginning stages of winding down FSAM entirely. You see, FSAM needs to be simplified so a buyer can come in and make a bid, knowing that they are just buying the two asset management contracts for Fifth Street Finance and FIfth Street floating rate. (NASDAQ:FSFR).

    Next I'd like to point out that both FSAM and MDLY have negative equity. Yeah, that's right, both companies are not really worth anything unless they SELL their asset management contracts of their BDCs which requires shareholder approval on the BDC level. The only way the BDC shareholders would ever approve of a sale and allow for the external managers to get something instead of nothing would be if the deal threw some kind of bone to the BDC shareholders. That bone could mean lower management fees, or fee concessions for a period of time, or both. It could also mean access a larger and more sophisticated team of professionals to manage the BDC, resulting stronger returns for investors. In other words, they need to sell the idea to the BDC shareholders which is never an easy thing to do but with the stocks trading around 50 cents of stated NAV i find it much more likely that shareholders would say yes to a new manager.

    This entire industry is going through some serious changes and its very likely that the BDCs we know today will not be the BDCs of tomorrow. The external managers are not going to exist in the same way they do today and its much more likely that in order to manage a BDC, you are going to need a large asset management platform with the team already in place so that you can provide shareholders the lowest cost fees possible. Otherwise, the model just doesnt really work and so there won't be any more of these new money-sucking asset managers with high fees anymore. It will only the largest and most sophisticated asset managers that can brag about their BDC asset management division as it will only make sense on that level of scale in order to compete with the fees that an internally-managed BDCs charge today. Then and only then will externally-managed BDCs be able to sustain premiums to NAV that allow for new capital to be raised accretively and for the betterment of everyone involved.(shareholders, managers, lenders to the BDC)

    As for MDLY and FSAM. Its hard to say how the end will come and when but we know its getting closer every day that passes. Fee pressures will remain, MDLY and FSAM earnings will stay depressed and the dividends of both entities should decline as neither one is currently covering their dividend. MDLY is the worst as its paying out about double what they make in core income. Investors are starting to wake up and you can see it in the stock prices of MDLY and FSAM. You can see the writing on the wall. The destruction isnt over for these externally-managed "CLASS A" stocks. The investors for these asset managers don't even have real voting rights. They are just vehicles for real owners of the asset management companies to sell on the market to make themselves rich. Look how Len T, the CEO of FSAM has converted millions of shares into the sellable class of stock. Its my opinion that they are looking for any chance they can get out before the hurricane thats coming destroys whats left of their asset management businesses. The time for change is now.
  • This old guy must know something, so I will close my eyes and throw darts at a stock list and go all in. DOW 30,000 soon
    https://finance.yahoo.com/news/nobel-winner-robert-shiller-stay-200519075.html

    Robert Shiller: Stay in the market because it ‘could go up 50% from here’
    Nobel Prize-winning economist Robert Shiller believes investors should continue to own stocks, because the bull market may continue for years.
    finance.yahoo.com
  • So with all the madness in the world ...
    Companies sporting 50 to 100 or negative P/E ratios attracting all the capital...
    BitCoin at all-time highs...
    http://www.cnbc.com/2017/05/19/bitcoin-price-record-high-japan-fork.html
    Crude oil seems it has topped-out in the low 50's, unable to get back to 60...
    Amazon bankrupting retailers, turning multi-million dollar malls into ghost towns....
    Profitable firms like Ford near 11, while un-profitable Tesla rockets to the moon....
    The markets continue to scream higher, even after Trump stumbles ...
    so, Where does it make sense to invest?

    Bitcoin breaks through $1,900 to reach record high with its market cap up $4 billion this week alone
    Factors including increased trading in Japan to debates over the future of bitcoin's underlying technology have boosted the price.
    www.cnbc.com
  • Anyone have any insight on GECC, Great Elm Capital? Substantial discount to NAV and sustainable dividend. Just caught my eye.
  • GGN declares 5 cents monthly (unch.) for July - Sept. Yield over 10%. Holding in both my accounts. After years of shareholder suffering (and several div cuts), it looks like GGN may have turned a corner. Main holdings are precious metal and energy stocks. They write call options aggressively against the portfolio. As of 12-31-16, call options written represented about 6% of their total assets, a very high percentage.

    Kel
  • I agree with Keltus that this market is running out of gas.
    So many risks exist in this environment, lots of downside to the steep climb of the last few months.
    As Ray Dalio recently stated: "It is all downhill from here"
    http://www.marketwatch.com/story/hedge-fund-pro-ray-dalio-has-some-bad-news-says-for-stock-market-investors-2017-05-12?siteid=yhoof2&yptr=yahoo

    Founder of the world’s largest hedge fund says ‘magnitude’ of the next downturn will be epic
    Bridgewater Associates’ Ray Dalio has some good news for Wall Street investors, and some bad news.
    www.marketwatch.com
  • any idea where this stops?
  • SPY since March 1st......hit a high on March 1 on strong volume. Has been struggling to top that ever since. Still near those highs and had 2 up days last week, but both on mediocore volume. Maybe time to be looking at shorting the market. I'd likely use a 2X or 3X bear ETP (exchange traded product) like SPXS or SPXU. Thoughts?

    Thanks......Kel
  • I wonder how low FSC has to get to get attention? Best of luck to those who are stuck but you might come out alright if you don't get overloaded and give up.
  • Is there anyone who will admit to bailing FSC last month to buy PSEC and now took another loss to buy FSC again? You best avoid yield traps or simply hang tight in one.
  • FSC's earning power is not good, but not too bad either. Current FSC's performance is mediocre with return rate about 7% for Q1/2017.
    Suppose purchase FSC at current PPS at $4.33. Then take a long vacation and take a look at this stock at the end of the year.
    Even with weak earning power, it is still quite safe to say it can cover 50 cents dividends yearly ( about 11.5%) for couple years.

    If the stock PPS is not up, I don't sale it and keep on collecting 11.5% yearly -- I consider it is fine.
    If the stock PPS is up. Then I can make profit by selling it.
    If the stock PPS is down, I add more FSC shares, and collecting dividends above 11.5%.
    Don't know what will happen to FSC a few years later, but it looks like a bargain to own somes shares of FSC now.
  • On January 28,2017 I posted about a Mutual Fund written up in Barron's. Dreyfus Global Real Return (DRRAX) this is a bearish fund with positions of Gold, short S&P Futures contract,Government Bonds and some select long stock position . I was negative on this fund as was everyone who posted on the string. At the time of posting the price was $13.80 yesterday 5/6 the price was $14.26 up $0.46 or 3.33% in a bit over 3 months. It's on my watch list and on a day when Gold tanks and the SP 500 skyrocket I will start a position. Might be a good hedge.

    DRRAX $14.26 (+0.07%) on Yahoo Finance
    https://finance.yahoo.com/quote/DRRAX?p=DRRAX

  • Anybody else notice VIX trading all the way down to 9.70 today? Only gets that low like 0.01% of the time. In other words, a pink elephant. We are indeed living in CRAZY times.
  • Jim Cramer claims the worst is over for VRX and that shorts are now covering.
    So long as VRX continues along the pathway to debt reduction, the market will eventually need to raise P/E valuation. I can see this stock rise to $20, then Joe Papa does a secondary to cut out half the debt and the stock goes to $30.
    https://finance.yahoo.com/quote/VRX?p=VRX

  • Took Yahoo long enough. Yahoo just changed the format of their stock landing page. Just wrote Verizon (their new overlord) that I was dropping their service. I will be back occasionally to talk but my main focus - since Yahoo no longer has a functioning stock spreadsheet for me that will be less and less. It is a shame. Like the people on the board. like Phil, Keltus, etc, but just about everything else has lost its' usefulness. Maybe this is a grumpy old person rant. Anyway, maybe Investor Village would not be too bad. Don't know. Yahoo has lost my vote for a decent stock place to go. Thank God for Schwab. Theirs is 1/2 decent but lacking a lot of the features I liked on Yahoo. Oh well. That is progress.
  • As an addendum to the refiners sector that wiseJade and I had many months back, when I recommended he buy Western (WNR)
    What do you guys think about a basket w/3% yield? CRAK - https://finance.yahoo.com/quote/CRAK?p=CRAK

    CRAK : Summary for VanEck Vectors Oil Refiners ETF - Yahoo Finance
    View the basic CRAK stock chart on Yahoo Finance. Change the date range, chart type and compare VanEck Vectors Oil Refiners ETF against other companies.
    finance.yahoo.com
  • Value Investor : BOA looks for high yield sell off by summer by Robert Hargreaves.

    I haves waited a long time on a high yield sell off expecting it earlier. I now have a large position of SJB the Junk Bond Short ETF currently down 4% as it sits on a new low. Might add some long Calls as they are currently very cheap.
  • I just bought more FRAK, BGR and FENY after this troubling news in APC.
    Looking into possibly buying some SWN and more OIH.
    https://www.blackrock.com/investing/products/240226/blackrock-energy-and-resources-trust-fund
    https://finance.yahoo.com/quote/FRAK/holdings?p=FRAK

    Energy and Resources Trust | BGR
    [BlackRock Energy and Resources Trust’s (BGR) (the 'Trust') investment objective is to provide total return through a combination of current income, current gains and long-term capital appreciation. The Trust seeks to achieve its investment objective
    www.blackrock.com
  • All in with SWN. Made a very nice run up early yesterday, lost most of that, and getting beat up today. Not far from 52 week lows now. Reports earnings before the open tomorrow (Friday, April 28). Very big position now with an $8.05 average cost basis.

    Kel