A Nose-Bleed Investment?

Sold 2,000 Shares of BCSF Today

Because my readers sometimes buy the same investments I own, which isn’t always a good idea, I like to provide updates when I buy and sell investments. I don’t do this for every buy or sell, but there are times when I think my thinking and investment activity is educational. You should always have rules for buying and for selling any investment.

I have received dividends in my ROTH and traditional IRAs from BCSF investments since August 2023, or about three years. I wrote about BCSF in August 2023 when I purchased my first 500 shares. At the time the Seeking Alpha QUANT rating for BCSF was “Strong Buy” at a numerical score of 4.85 on the 5.00 scale. Usually Fidelity’s Equity Summary Score is not a deciding factor for my investment decisions. However an encouraging ESS of 9 out of 10 was very encouraging at the time of my purchase. Things have changed.

I also said this in that post: “BDCs are known for generally high yields. You get yield, like 9.40% for BCSF, but you do this knowing the value of your shares is not likely to increase in the same way that shares of a technology company might grow. Therefore, I would not have a portfolio with a total focus on BDCs.”

Results 2023-2026

During my time of ownership I received a total of $10,230 in dividends. The cost of my shares totaled $30,433. That doesn’t seem terribly bad. However, the current dividend yield is at a nose-bleed high. It is 14.83%. Dividend yields in the BDC sector are usually more rational in the 5-8% range, so BCSF’s current yield is questionable from a risk/reward perspective.

Thankfully I bought the shares at a good price, but I still was not able to sell them for my average cost of $15.22. I received just over $13 per share so my capital loss per share was $2.22. However, I received over $5 per share in dividends from this investment, so while it was painful to sell at a “loss” I did not feel the true pain of a loss from an investment that doesn’t pay a dividend. Always include dividends received in your analysis of an investment. That is “total returns.”

Five-Year Total Returns

As I looked at the five-year total returns and saw how much BCSF lagged the S&P 500 I decided the cash from the sale had more value than continuing to hold the investment for the dividends. While BCSF might do just fine going forward, I see better opportunities for the $26,000 in cash that will post to my accounts. $13,000 will be in my ROTH IRA and the other $13,000 will be in my traditional IRA.

Options Trading

Another downside for BCSF in our portfolio is that it is a poor investment for trading options. I can use the $13,000 cash in either or both accounts and sell cash covered put options on SEZL. Sezzle Inc doesn’t pay a dividend. However, I can probably make $400-500 per month selling cash covered put options on SEZL.

Because of the BCSF sale in my ROTH, I now have a little over $40K in cash available. This is a powerful lever for trading cash covered PUT options. I could also buy shares of a company’s stock and sell covered call option contracts.

If I sold ten PUT contracts on Ford (F), I could make about $100 per week. My risk is that I might be assigned the shares for $14,000 – for the PUT that expires this Friday with a contract price of $14. If I was willing to sell one PUT contract on Oracle (ORCL) I can easily make about $300 this week, as ORCL has weekly options as well. This is far better than what I might expect quarterly from BCSF.

Summary

Declining revenue and a high dividend yield are yellow caution flags. When this happens you should evaluate the investment in question. Of course, if you only buy ETFs or mutual funds you leave these decisions in the hands of the fund managers. For options traders it is far better to own ETFs and individual stocks. The following are from Seeking Alpha.

It pays to review the returns of any investment. In general it is better to sell an investment that has fallen out of favor or that has declining revenue than to hold it and hope for a better day to sell. It is also nice to have cash from a sale for trading options. That income can easily exceed the income potential of the dividends from the investment you sold.

BCSF Business Profile

Bain Capital Specialty Finance, Inc. is business development company specializing in direct loans to middle-market companies. The fund seeks to invest in senior investments with a first or second lien on collateral, senior first lien, stretch senior, senior second lien, unitranche, mezzanine debt, junior securities, other junior investments, and secondary purchases of assets or portfolios that primarily consist of middle-market corporate debt. It typically invests in companies with EBITDA between $10 million and $150 million.

Seeking Alpha Subscription Information

Of all of the resources I use, the most helpful is Seeking Alpha. The Seeking Alpha QUANT rating is a huge factor in my investment success. If you decide to explore a Seeking Alpha subscription, please use the following link. Seeking Alpha

SEEKING ALPHA INFORMATION AND SUBSCRIPTION

You can also scan this QR Code to get the same information.

Past performance does not guarantee future results, Seeking Alpha does not provide personalized advice, and it is not a registered investment adviser.

We accept advertising compensation from companies that appear on our site. This website represents my opinions, which may not reflect those of Seeking Alpha, and does not constitute an investment recommendation or advice.

If you have any questions or problems getting connected to Seeking Alpha, reach out to them with this email address: subscriptions@seekingalpha.com