Sometimes trades are difficult to find, and sometimes, they just fall into your lap. Today’s trade falls into the latter category, because the company was brought to my attention during a casual conversation with an advisor friend of mine. This advisor, who wishes to remain nameless, said that his best investment last year was the publicly traded private equity firm Main Street Capital (NYSE:MAIN).
Also known as a business development company, or BDC, Main Street Capital focuses its investment strategy on companies with revenues of $10-$150 million, and EBITDA of $3-$20 million. The firm also concentrates on strong companies with seasoned and proven management, and in companies where the management has their own money at risk in the enterprise. MAIN’s competitors in the space are American Capital (NASDAQ:ACAS) and MCG Capital Corp. (NASDAQ:MCGC).
The intriguing thing about Main Street Capital is that it specifically avoids the risk of owning start-up companies. Instead, the company’s selection criteria includes companies with positive free cash flow, and that have a niche market position, and that generally have a competitive advantage in their industry. Most importantly, Main Street Capital invests on traditional businesses that you might find; well, in any town on Main Street USA.
For traders, MAIN shares represent a sensational momentum play. Take a look at the chart here of the stock during the past 52 weeks.
As you can see, the stocks is trading just below its latest 52-week high, and it’s been making consistent new highs for most of the year. Those new highs also happen to be new all-time highs for the private equity firm’s shares. During the past 12 months, MAIN shares are up more than 48%, and that doesn’t include the 5.7% annual dividend yield shareholders have enjoyed over that time.
It’s no surprise to me that MAIN has enjoyed strong success, especially in a yield-hungry world where bank deposits pay virtually zero, and where the 10-Year Treasury note trickles out a yield of about 1.8%. What has been a surprise is the strength of the share price from a technical perspective.
I think the latest breakout in MAIN is something traders can take advantage of here for another 10%-15% gain over the next several months. That would put the shares at about $34.88 to $36.47 above current levels ($31.71).
Of course, there’s always the possibility of a downturn in a high-flying stock like MAIN, so be sure to set a stop-loss price at about 10% below your buy price
At the time of publication, Jim Woods did not own any of the stocks mentioned here.