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Interest rates are rising, and despite rumors that the Federal Reserve may take a break in the fall, it will depend on when inflation decides to take a break. Based on current food and fuel prices, it doesn’t look like it will be anytime soon. Investors can count on increases of 50 basis points in June and July, and most likely, with the start of the balance sheet liquidation by the Fed, there could be a peak along the Treasury curve this summer.
So what should balanced growth and income investors do? The potential for capital appreciation on low-coupon bonds is negligible, and with the market perhaps poised for a continued sell-off, risky high-yield or leveraged funds make no sense for those with low risk tolerance. What makes sense is to look at business development stocks that pay outsized dividends and offer growth potential.
Business Development Corporations (BDCs) are organizations that invest in small and medium-sized businesses, as well as struggling businesses. A BDC helps these businesses grow in the early stages of their development or regain a solid financial footing.
Jefferies is very positive on the top six BDCs and has this to say about the strong first quarter and outlook for the rest of the year:
After a robust 2021 for the industry, the macro downturn has evolved significantly year-to-date, while BDCs delivered strong results in Q1 2022 with higher net operating income, some increases in dividends, increased yields and earnings. The peer group has sold out since mid-April and although we are selective, we consider five large companies to be the best picks.
Although all six stocks are rated Buy at Jefferies, it is important to remember that no single analyst report should be used as the sole basis for any buy or sell decision.
Gamma CAF
This is an off-the-radar idea that offers exceptional total return potential. AFC Gamma Inc. (NASDAQ: AFCG) originates, structures, guarantees 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 medical or adult cannabis.
The Company primarily issues loans structured as senior loans secured by real estate, equipment and licenses or other assets of the lending parties to the extent permitted by applicable laws and regulations governing such lending parties. AFC Gamma has elected and qualified to be taxed as a real estate investment trust (REIT) for US federal income tax purposes under the Internal Revenue Code of 1986.
The company posted outstanding first-quarter results that exceeded earnings and revenue expectations. AFC Gamma has beaten consensus revenue estimates three times in the past four quarters.
Investors receive a distribution of 12.28%. Jefferies has a price target of $26 on the stock and the consensus target is $24.58. The stock closed Wednesday at $17.84 per share.
