Barlow’s Research Roundup: ‘Five stages of grief’ for business development corps

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Previously hot sector under pressure

BofA Securities analyst Neha Khoda wrote a report on the risks from U.S. business development corps (BDCs) with the provocative title, Five stages of BDC grief,

“Private BDC redemptions have picked up along with a slow-down in sales, impacting net cash available to invest and operate. We expect sales net of redemptions for unlisted BDCs to fall into negative territory for the first quarter on record, impact of which is expected to surface over the next 1-3 qtrs. Clearly a concern, current situation portends emerging liquidity stress, and potentially credit stress in these BDCs- which we consider the weakest link within Private Credit … BDCs have levers they can pull to manage redemptions, ranging from benign (stage 1-3) to more severe portfolio impact. 1) Cash/revolver management 2) Rerouting portfolio runoffs 3) Par sales which could set off contagion risk 4) Forced liquidations which can hit NAV 5) Increased credit losses which can accelerate the timelines of stress … While the first few stages of BDC stress are manageable, liquidity strain can transform to true credit stress when sales become forced. That said, the typical unlisted BDC would need to sustain 5+ consecutive. quarters of max. allowable redemptions along with continued slowing sales, before reaching this most severe stage. Timeline compresses materially if credit losses increase, or platform is over-levered”

Oil shock is real

RBC Capital Markets head of global commodity strategy Helima Croft outlines the geopolitical status of the U.S/Iran conflict,

“The economic cost of the six-week conflict, particularly for import-dependent developing nations, was a central theme of the discussions this week, with the IEA, IMF, and World Bank issuing a statement on continued coordination between the organizations for policy and financial support for countries most impacted by the shock … IEA Executive Director Fatih Birol highlighted that the magnitude of the supply loss far exceeds the oil shocks of the 1970s (5 versus 13 mb/d) that created an emerging market debt crisis … Birol noted that around 80 regional facilities have been damaged, with a third of those so severely impacted that a full recovery timeline could exceed two years … multiple speakers at the Institute of International Finance’s Global Outlook Forum warned that Asia is already experiencing a severe energy crisis that has led to rationing and work-from-home mandates to mitigate the impact of spiraling fuel shortages. We also encountered some pushback to the optimistic view that war ends soon, with several leading experts suggesting that the risk of escalation remained elevated due to the divergence between U.S. and Iran negotiating positions”

This sounds like signs of a global growth slowdown, but the market does not seem to reflect this risk.

Small caps outperform

Also from BofA Securities,equity and quant strategist Jill Carey Hall identified U.S. small cap value stocks as top first quarter performers among size/style categories and highlighted the results of a stock screen for smaller companies likely to exceed sales and profit estimates,

“Small Cap Value was the best-performing size/style box in 1Q (up 5 per cent. And within our Russell 2000 factor work, Value factors outperformed the equal-weighted. index by 1.4ppt on average … The only groups with better returns in 1Q were Cash Return (up 4.4 percentage pointt; more below) and Momentum (up 2.0 ppt) … With 1Q earnings season kicking off, we screen for small & mid caps with potential to positively/negatively surprise, based on Buy/Underperform-rated stocks where our analyst is above/below consensus ex-BofA and also considering the prior quarter’s results as beats/misses tend to persist. Plus: in light of cash return trends discussed above, we also include screens of Buy-rated high share repurchase stocks and div. payers in small caps”

Stocks on the small-cap list, many of which would be considered at the larger end of small-cap range here, that are most likely to interest domestic investors are Boot Barn Holdings inc., Planet Fitness inc., Patterson-UTI Energy inc., Virtu Financial Inc., Doximity Inc., AECOM, Extreme Networks Inc. and IDACORP Inc.

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Diversion

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