It might sound somewhat defeatist, but in a year like 2015, I’m just happy that my entry in the Best Stocks contest is almost in the black. It’s not that I don’t expect Prospect Capital (PSEC) to deliver solid returns. In fact, I expect it to deliver returns of 50% or more over the next 12 months. It’s just that 2015 has been one of those years when cheap value stocks have a way of getting cheaper. With a little over one quarter to go, let’s revisit Prospect Capital and why I still believe that winning the contest this year is a very real possibility.
I’ll start with valuation. With the single exception of the 2008 meltdown, Prospect Capital is the cheapest it’s ever been based on the price/book ratio. Prospect trades for just 77% of book value. Under normal conditions, you would expect Prospect to trade at a slight premium to book value. After all, management expertise and access to cheap capital are worth something. At current prices, the market is implicitly saying that book value is either overstated by 23% or that it expects management to destroy a lot of value in the months to come.
Source: Charles Sizemore
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