January 26, 2011

A Portfolio Position Upgrade: FSC

An undervalued stock offers some short-term potential

Fifth Street Finance (FSC), a stock that I’ve mentioned several times in the past, was upgraded on Wednesday by Stifel Nicolaus from Hold to Buy. The upgrade was based on valuation, dividend yield and earnings growth. The research note is restricted and cannot be reproduced here.

Another positive for FSC, and BDCs in general, was the recent decision of the Financial Accounting Standards Board (FASB) to back away from a proposal to require fair value accounting for valuing loans, as opposed to the currently used accrual method.

We have owned this stock since February 2010. While the double digit yield was a big driver in establishing the position, we also felt it was undervalued. In my view, FSC will likely offer more share price appreciation on a short-term basis.

Disclosure -- QES portfolios and the author own the following positions:  FSC.

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