Back in the States

Posted by Dan Hung

June 13, 2008

After a two week vacation, the first I remember taking since beginning writing this blog, I’m back and ready to blog with a vengeance! Keep a close eye the next few weeks as I’ve got a whole slew of new posts planned. But, before we begin, I’ve got a little to catch up on as far as my personal trading and future developments for this blog. Basically, it’s full disclosure time!

No Longer a Student
As I mentioned a few weeks back, I’ve graduated university and will be starting a job working in investments at BlackRock Kelso Capital. Here’s the description according to their website:

Our investment objective is to generate both current income and capital appreciation through our debt and equity investments. We invest primarily in middle-market companies and target investments throughout the capital structure that we believe provide an attractive risk-adjusted return.

I’m not entirely sure that I will be able to keep this blog up according to my company’s policies, but my employers are aware of it and haven’t told me to stop so I will do my best to keep writing quality content until things change. BlackRock Kelso Capital invests in private companies and doesn’t participate in the stock markets so there is no obvious conflict of interests. But, to make absolutely clear to readers, this blog features my individual opinions and philosophies and does not represent the views of BlackRock Kelso and its employees. I will never disclose information proprietary to my company or any third party which has disclosed information to my company. And, I am not authorized by any managers to speak on my company’s behalf so please refrain from asking me any questions about my job or employer.

BlackRock Kelso is publicly traded under the ticker BKCC and has recently been added to my personal investments. I will only discuss this stock’s investment merit and will refrain from providing added commentary in addition to earnings call transcripts that are released each quarter. I apologize to those looking for more insight as far as this position.

Portfolio Moves
While the company I work for invests only in private businesses, they do have a tangential relationship to BlackRock (hence the name) and, as a result, I am now subject to more stringent trading restrictions. As I’ll probably be working a lot more hours, I won’t be able to trade as actively as I have in the past anyway and, as a result, I’ve been in the process of unwinding positions in my various portfolios and gearing up for a more long term oriented strategy.

Portfolio B is no longer under my control and I have never truly had any financial interest in it. At final tally, the portfolio is down 15% through the first 6 months of this year after being up 15.6% over the last 6 months of 2006 and 22.3% over 2007. The final constitution portfolio consists of Mastercard, J. Crew, Bank of America, and one allocation of cash. I believe Mastercard is near full value and will unwind this position before I officially begin work. And, I still believe in the long-term (2+ year) merits of J. Crew and Bank of America especially when recession fears finally bottom which I predict to happen somewhere by the end of Q3 this year.

Portfolio A is being unwound after several years of highly volatile performance. China Mobile was stopped out in the mid-70s during my trip. I’m looking for an opportune moment to sell VMW. My sell target at $70 was nearly reached when the stock closed at $69.98 a week and a half ago, but unfortunately it wasn’t executed. I’m rather upset about this. It just goes to show that active management is a full-time pursuit. New positions purchased in Portfolio A will now be of a more similar to those purchased in the former Portfolio B as a I shift towards my more realistic investment strategies. I will post more in detail on these changes in the next few days.

I have purchased a full position in BlackRock Kelso Capital. No, this wasn’t as a result of some patriotic pride in my new employer, but because I believe the stock offers a compelling risk-return bargain at current levels. I purchased at $12.40 which was 20 cents below the $12.60 NAV per share reported in the most recent earnings report. In the most recent earnings call, this fall in NAV was described as a decline in value due to instability in the credit markets. While that means that the immediate value of the company’s assets have decreased, the company focuses mainly on loan investments in high free cash flow businesses and this would imply that simply holding these assets to maturation will realize value in excess of the current stated market value.

Despite rocky markets over the last two or three quarters, BKCC has yet to realize any significant losses, reports continued financial strength in the companies its invested in (remarking that 96% of its portfolio has healthy credit ratings), and has shown no risks to its large quarterly dividend. Purchasing the stock at $12.40 allows for projected dividend yield of 13.7% and the stock price would seem to have an upside of $14.95 based on the dividend closing to the 11.5% yield on invested capital reported this quarter, or another 20% in stock price appreciation. Can it happen within the next 12 months? Maybe, maybe not. But, I’m willing to take that risk. With prices now lower than $12, it seems that I may have jumped the gun on my purchase, but my investment thesis still stands and the risk-return trade off looks even better.