An Interview with BDC Analyst Jordan Wathen | Where the Money Is - 3/13/14 | The Motley Fool

TL;DR

Jordan Wathen discusses BDCs and small cap stock investments, highlighting market valuation challenges and potential opportunities.

Transcript

we're exploring the world of bdcs you're in the right place folks because this is where the money is welcome to the show folks I Am David Hansen joined on the phone today by Jordan wthin thanks for joining us Jordan hey I'm glad to be here Jordan uh is one of our contributors for fool.com he focuses mostly on the BDC industry business development c... Read More

Key Insights

• 🥺 Market valuations have increased, leading to higher prices, multiple expansions, and economic recovery impacting earnings multiples.
• ❓ Business Development Companies (BDCs) function as mutual funds for Middle Market companies, offering substantial dividend yields.
• 😘 Small-cap stocks appeal due to their simplicity, specific exposure possibilities, lower prices, and potential for lucrative buyouts at premium prices.
• 🫰 Exclusion of BDCs from indexes is due to fee-passing issues, yet it presents short-term selling pressures and potential buying opportunities.
• ❓ Understanding the operations of Middle Market companies and their investability is essential for investors in the BDC sector.
• 🈹 Market fluctuations during economic downturns affect BDC performance, leading to significant discounts and discounted values.
• 👾 Leadership in the BDC space includes Ares Capital, Prospect Capital, and Main Street Capital, each with distinct approaches and focus areas.

Questions & Answers

Q: What factors have contributed to the market's higher valuations, according to Jordan Wathen?

Jordan Wathen attributes the market's higher valuations to increased prices compared to previous years, influenced by earnings growth and economic recovery.

Q: How does Jordan Wathen define Business Development Companies (BDCs) and their unique traits?

Jordan Wathen defines BDCs as mutual fund-like entities that invest in debt and equity of smaller Middle Market companies, noting their requirement to pass on 90% of income as dividends.

Q: Why does Jordan Wathen prefer investing in small-cap stocks over larger companies?

Jordan Wathen favors small-cap stocks due to their simplicity, specific exposure opportunities, lower prices, and potential for lucrative buyouts by larger firms.

Q: How does the exclusion of BDCs from certain stock indexes impact investor perceptions?

Jordan Wathen explains that BDCs are excluded from indexes due to fee-passing complications, emphasizing that it does not reflect the quality of BDC investments and can create buying opportunities amidst sell-offs.

Summary & Key Takeaways

• Jordan Wathen discusses the current market valuations, expressing caution due to high prices and economic recovery affecting earnings multiples.

• He explains the concept of Business Development Companies (BDCs), highlighting their structure as mutual funds for Middle Market companies with significant dividend yields.

• The conversation extends to focus on small-cap stocks, emphasizing their attractiveness due to understandability, specific exposure, and potential for buyouts at advantageous prices.