A cyclical recovery, based on consumers spending more and businesses hiring more, is admittedly a ways away. But just because unemployment is persistently high and corporate IT spending is soft doesn’t mean there aren’t areas of big opportunity if you know where to look.
One opportunity highlighted by Bryan Perry, editor of the Cash Machine dividend and income newsletter, is the growth in capital markets over the last year or so.
“Some of the biggest upside surprises earlier this year were delivered by the asset managers and private equity firms,” he says. “Business is really picking up in the form of rising levels of assets under management, mergers, acquisitions, financings and consulting.”
That makes sense, when you think about it. In an environment where revenue growth is hard to come by, it’s likely that big blue-chip stocks are spending money on restructurings to prop up margins or strategic acquisitions to find growth in the near-term. A few deals of note recently include:
Last week, IBM (IBM) announced it bought Trusteer, an online security company, for between $800 million and $1 billion, according to reports.
Campbell’s Soup (CPB) recently divested some European operations for north of $500 million.
That old dog BlackBerry (BBRY) has been making noise about being open to a buyout.
Yahoo (YHOO) continues to snap up small Internet players, including the $1.1 billion Tumblr deal, in a frenzy as it tries to figure out mobile.
Deals like these provide a great opportunity for investors if they go right, but they don’t always wind up being for the best. That’s why it’s important to tread carefully in this space.
3 Stocks to Buy: HTGC, KFN, PSEC
Bryan Perry of Cash Machine has three ways to play the investment and buyout boom. Rather than chase buyout targets or blue-chip behemoths rolling in competitors, however, he advocates buying well-run investment companies that spread their money around. This can involve direct investment in a portfolio of companies, loans or outright buyouts to take a publicly traded stock private and squeeze the most money out of operations.
Not only does this add some diversification, but it also allows you to tap into huge dividends as these investment companies return the profits on their investments back to shareholders — via paybacks that can top 12% annually!
Here are his recommendations:
Hercules Technology Growth Capital (HTGC), based out of Palo Alto, Calif., is a leading specialty finance company providing venture debt and equity to venture capital and private equity backed technology and life science companies. The company was founded in 2003 and consists of a team of 13 managing directors and principles with more than 274 years of venture capital and specialty technology investing experience. Current Yield: 7.9%
KKR Financial Holding (KFN) is a very smart publicly traded private-equity firm with strong exposure to natural gas, which is one of Perry’s major investment themes. The company posted very good Q1 numbers and has a very constructive chart formation. Technically, the chart shows a near-term breakdown, so it remains a “watch and see” story for now … but may be a good buy soon. Current Yield: 8.3%
Prospect Capital (PSEC), one of the “big kahunas” in the business development corporation (BDC) sector. With a market cap of $1.19 billion and a massive dividend yield, this BDC offers a hugely attractive dividend yield with plenty of liquidity for fund managers to get involved with in a sector that’s revving up with the pace of small-business lending. Current yield: 12.0%.
Related Reading
Learn more about Bryan Perry and his newsletter. (Cash Machine)
What more M&A means for investors. (The Slant)
BDCs may be well-positioned for higher interest rates. (Barron’s)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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