4 reasons prospect capital corporation is still a buy

4 Reasons Prospect Capital Corporation Is Still

a Buy

1. Diversity and QualityProspect pays a 12.4% annual yield on a monthly basis, but earns its high returns the right way.

It's true the companies Prospect invests in aren't of tip-top credit quality, but portfolio is diversified to a point where we don't have to worry too much about each individual company.

Prospect's $6 billion investment portfolio is spread out among 138 geographically diverse companies representing about 20 different industries.

1. Diversity and Quality

Source: Company.

1. Diversity and QualityProspect has become very selective about the companies it invests in. Any prospective investments go through a four-step valuation process consisting of a third-party valuation, Prospect's portfolio managers, an audit committee, and the Board of Directors.

In fact, less than 2% of investments that begin the screening process actually make it to closing.

1. Diversity and Quality

The rate of non-accruals (non-performing loans) has dropped from a peak of 5.9% in 2009 to just 0.3% for the past year.

2. Steady, growing incomeAs a result of the high-quality and diverse portfolio, Prospect's dividend is remarkably safe.

In fact, the company has already announced its dividends through December, and should further declare its dividends through March 2015 when it reports earnings in late July.

2. Steady, growing income

Prospect has actually made no dividend cuts whatsoever since beginning monthly distributions in 2010.

3. Asset growth Since 2005, the company has grown by more than 6200%, but more importantly, Prospect has grown impressively on a per-share basis.

Prospect's net investment income in 2005 was $2.4 million, or about 2.3% of the company's assets at the time.

In 2013, Prospect's net income was $324.9 million, which represents about 6.3% of assets. Net asset value has also risen, growing from $10.24 per share to $10.68 since 2010.

4. It's still cheap

Despite the recent gains in share price, Prospect trades for exactly its net asset value of $10.68 per share. While this is a significant improvement of the fire-sale valuation we've seen over the past few months, it is still very low on a historical basis.

4. It's still cheap

4. It's still cheapProspect typically trades in a range of 1.025 to 1.125 times its NAV, which would represent a price range of $10.95 to $12.01 per share.

I suspect there is still some hesitation on the part of investors, but once the company reports its earnings later this month and the market sees that it's still business as usual at Prospect, the company should begin trading in its usual valuation range.

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