Consider Alternative Vehicles

 | Apr 05, 2012 | 12:30 PM EDT  | Comments
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Stock quotes in this article:

ticc

,

HTGC

Investors seeking solid yield opportunities have fewer choices than they did a few years ago. The financial crisis and anemic economic growth have kept a lid on interest rates. In addition, Fed policies focused on providing ultra cheap money have resulted in historically low yields on traditional safe investments such as CDs and government debt. Expanding domestic energy production has brought energy master limited partnerships (MLPs) back into popularity for high-yield investors who are seeking alternative vehicles.

I have invested a significant amount of my income portfolio in this sector. A good portion of the rest of my income generating allocation is in Business Development Companies (BDCs). This relatively unknown area provides good high-yield opportunities and should do well as economy continues to grow -- even at below trend-line growth. These companies have done a solid job stepping into the breach in providing medium and emerging firms access to capital and debt as banks have pulled back on lending to this sector.

Hercules Technology Growth Capital HTGC is a private equity, venture capital, and venture debt firm specializing in providing debt and equity to privately held venture capital and private equity backed companies and select publicly-traded companies. The firm is also a small business investment company (SBIC). It offers growth and emerging growth capital and structured debt financing to companies at all stages of development. It specializes in venture debt in the forms of senior secured and subordinated working capital loans, senior revolving loans and bridge loans, venture leasing, and select direct equity capital.

Four reasons HTGC is a solid income play at $11 a share:

  1. The stock yields 8.3% and sells at just 10% over book value.
  2. The company is showing consistent earnings growth. It earned $0.91 a share in FY2011, and analysts have it making $1.04 in FY2012 and $1.14 in FY2013.
  3. Revenue growth is even more impressive, with the company expected to grow sales north of 20% for both FY2012 and FY2013.
  4. The stock is trading below 10x forward earnings and insiders have made several new purchases over the last six months.

TICC Capital TICC is a business development company that operates as a closed-end, non-diversified management investment company. The firm invests in both public and private companies. It invests in secured and unsecured senior debt, subordinated debt, junior subordinated debt, preferred stock, and common stock.

Four reasons TICC is a solid high yield choice at under $10 a share:

  1. Insiders have bought more than $1 million worth of net shares over the last eight months.
  2. TICC yields over 11% and although dividend payments have been somewhat erratic over the last decade, the dividend payout is up more than 150% since the company's first distribution in 2004.
  3. The stock is selling for less than 9x forward earnings and consensus earnings estimates for FY2012 have risen in the last month.
  4. The stock is selling at just 4% over book value and it has cheap five-year projected PEG ratio (0.61) for such a high yielding vehicle. The company also just raised almost $50 million by issuing common stock. Proceeds should be put to use in new debt and/or equity investment opportunities.

 

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