Attention Prospect Capital Shareholders: It’s Not All Doom and Gloom

Source: Thinkstock

Source: Thinkstock

recently covered Prospect Capital (NASDAQ:PSEC), its primary operations involving lending money to small companies to help them grow and expand while being paid back with interest. After its quarterly report, I argued that the stock was a buy after being beaten down several percentage points. The stock had been solid for sometime, trading predominantly in a range of $10.00 to $12.00 for years. It recently dipped into the $9.00 range briefly after a string of bad news. I maintain that a solid strategy has been to buy on the dips and reinvest the dividends to compound the investment. This is because the stock sports a 12 percent yield and pays monthly dividends. The stock is a fantastic buy for a tax favored account in my opinion.

It should be pointed out that after declaring dividends for the remainder of 2014, it will have paid out 74 consecutive payments. To top it all off, the dividends are being increased this year and will max out at 11.0600 cents per share in December 2014. After some of the volatility, the purpose of this article is to provide an update and reiterate my buy recommendation after receiving some very positive news.

Prospect Capital recently announced that based on its discussions with the staff of the Division of Investment Management and the Office of the Chief Accountant of the Securities and Exchange Commission, Prospect Capital will not be required to restate its prior period financial statements to consolidate certain wholly owned or substantially wholly owned holding company subsidiaries.

Prospect announced in its filing on Form 10-Q for the quarter ended March 31, 2014 on May 6, 2014 that the Securities and Exchange Commission staff had asserted certain wholly owned holding companies were investment companies. Due to this, it was suggested that such companies were required to be consolidated in the historical financial results and financial position of Prospect Capital. Thus, the real possibility that the company would have to conduct a restatement of such financial statements came to light. This sent shares spiraling.

Now, at that time, Prospect Capital disclosed that it disagreed with the views of the Securities and Exchange Commission staff and wished to appeal the conclusion through Office of the Chief Accountant of the Securities and Exchange Commission. Based on those continued discussions with the Securities and Exchange Commission staff, Prospect has had a large victory. First, it was determined that Prospect’s historical non-consolidation of certain wholly owned and substantially wholly owned holding companies will not require restatement of Prospect’s prior period financial statements.

Further, upon the adoption of ASU 2013-08 by Prospect for the June 30, 2015 fiscal year, Prospect will begin consolidating on a prospective basis certain of its wholly owned and substantially wholly owned holding companies formed by Prospect in order to facilitate its investment strategy. This is a very favorable outcome for the company going forward. A restatement of all of the financial results could have opened the company up to severe scrutiny and could have driven the share price lower. Instead, we just got an all clear signal. Brian Oswald, Chief Financial Officer of Prospect, stated:

We would like to commend the Securities and Exchange Commission staff for the prompt and professional manner in which they handled the situation. We are pleased that Prospect was able consult with Office of the Chief Accountant of the Securities and Exchange Commission and Division of Investment Managementfor an acceptable conclusion.

The stock has been nailed since the release, but after this positive news, the stock has reversed course. At the time of this writing, the stock trades at $10.13 and it is a buying opportunity in my opinion. The company has made important investments in the prior quarter and I expect these to pay off in future quarters. With a last stated book value of nearly $10.70, and having paid out over $13.00 in dividends in a decade per share, the stock is at a significant bargain at current levels.

Disclosure: Christopher F. Davis is long Prospect Capital. He has a buy rating on the stock and an $11.55 price target.

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