American Capital Poised to Break Out?

Full disclosure: I own three stocks: American Capital Strategies (ACAS), Transocean (RIG) and Apple (AAPL). I started investing in American Capital Strategies a few months ago. I like a good turnaround story. I just want to pass on what I think is happening with this stock and company.

American Capital is a business development company that makes money three ways. They buy and own whole companies, making money off the profits and/or selling the company at a profit once they turn it around. They take a position in a private company, making money when its sold. And they lend money in various ways to companies, making money off the interest or again gaining a position in the company. So they are dependent heavily on the overall health of the economy and the financial sector in order to thrive.

As the great financial freeze took place American Capital got hammered. Because they are heavily leveraged (i.e. they receive a lot of loans at one rate, lend it out to companies at a higher rate) they got squeezed. In addition, they could not sell their portfolio companies due to the same freeze. They got stuck and many saw bankruptcy in the future. But American Capital has great management and they were able to restructure internally, negotiate new terms with the banks, pay back a lot of debt and now are poised to climb back. The stock was in the mid 40s before the freeze, got down in the 2s and is now in the 8s. ACAS was recently upgraded by UBS (to 10) and Macquarie (to 11).

I think American Capital is climbing much higher. It owns some great companies and this week announced it has sold one of those companies, trVIN, for $131 million. Liquidity is returning to the finanicial sector and that is great news for ACAS. At the end of the 3Q, ACAS announced its holdings have a Net Asset Value of $9.59 per share. But remember, this is in an economy where financial liquidity is still slow and conservative estimates are in order due to the scrutiny in this sector.

In the months ahead, as liquidity does return and most importantly the economy picks up steam, ACAS is poised to break out. Legendary hedge fund investor John Paulson bought 13% of this company at about $5 per share. Assuming the economy continues to heal, I believe Paulson and all Allied Capital shareholders will do very well. As always, do your own due diligence and Allied Capital has some great presentations on its website to allow you to dig further.

Disclosure: I am long ACAS.