Interest rates are rising, and despite chatter that the Federal Reserve may pause in the fall, that will depend on when inflation decides to pause. Based upon current food and fuel prices, that does not look to be anytime soon. Investors can count on 50-basis-point increases in June and July, and most likely, with the Fed beginning the balance sheet runoff, there could be a spike along the Treasury curve this summer.
So what are balanced growth and income investors to do? The potential for capital appreciation on low coupon bonds is negligible, and with the market possibly primed for a continued big sell-off, risky high-yield or leveraged funds make no sense for those with low risk tolerance. What does make sense is looking at the business development stocks that pay outsized dividends and offer growth potential.
Business development companies (BDCs) are organizations that invest in small and medium-sized companies, as well as distressed companies. A BDC helps these firms to grow in the initial stages of their development or to regain sound financial footing.
Jefferies is very positive on six top BDCs and had this to say about the solid first quarter and prospects for the rest of the year:
Following the robust 2021 for the industry, the macro-back drop has evolved substantially YTD while BDCs generated solid first quarter 2022 results with net operating income upside, some dividend increases, yield expansion and earnings beats. The peer group has sold off since mid-April and while we would be selective, we consider five top companies as top picks.
While all six stocks are rated Buy at Jefferies, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
AFC Gamma
This is an off-theadar idea that offers outstanding total return potential. AFC Gamma Inc. (NASDAQ: AFCG) originates, structures, underwrites and invests in senior secured loans and other types of loans and debt securities for established companies operating in the cannabis industry in states that have legalized medicinal or adult-use cannabis.
The company primarily originates loans structured as senior loans secured by real estate, equipment and licenses or other assets of the loan parties to the extent permitted by applicable laws and the regulations governing such loan parties. AFC Gamma has elected and qualified to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes under the Internal Revenue Code of 1986.
The company posted stellar first-quarter results that topped both earnings and revenue expectations. AFC Gamma has beaten consensus revenue estimates three times over the past four quarters.
Investors receive a 12.28% distribution. Jefferies has a $26 price target on the shares, and the consensus target is $24.58. The stock closed on Wednesday at $17.84 a share.
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