Don’t ever look at any of your owns stocks and think about what you paid for it. If you are up, great. But it doesn’t matter, as each day — or at least each month — you need to look at that stock and ask yourself: Would you buy it again, and under what price? And if you are down, the same question applies. Also, it is important to not hold a stock, hoping that it will inch up to your buy price so that you can sell it. The hold-and-hope method never ends well.
At the start of this year, I joined my colleagues at InvestorPlace as each of us presented one stock to buy and own for all of 2020. My stock was — and is — Hercules Capital (NYSE:HTGC).
Let’s get the elephant in the room out of the way first. For the full first quarter of 2020, HTGC stock has dropped by 45.5% in price. After including dividend distributions, the total return is a net loss of 43.9%.
Hercules Capital (HTGC) Total Return 1Q 2020
But as I led in this report, it doesn’t matter what the starting price was — only what it is right now, which is about $7. And that is a pretty nice price to buy HTGC stock. The underlying company has a whole lot of very valuable assets and lots of cash and credit capability.
What Is Hercules Capital?
Hercules Capital is an alt-financial company providing finance (along with equity participation) to technology companies in various states of development. Technology is one of the better forward-looking segments now. Tech companies are providing solutions for e-commerce, remote management, and also life science products and services. Many of Hercules Capital’s highly diversified portfolio companies should continue to advance — and then some.
Hercules is structured as an investment company, also known as a business development company. The Investment Company Act of 1940 founded these BDCs, and the Small Business Investment Incentives Act of 1980 further codified them.
Both of these bits of U.S. law allow Hercules to largely avoid federal income tax. This perk helps it generate more cash, which it uses to fulfill bigger dividend distributions.
Hercules is a venture capital-style company that focuses exclusively on tech firms. It provides loans to fund development and helps coach companies through their IPOs. And since its founding in 2003, it has successfully worked with nearly 500 companies. Hercules has brought billions of dollars of value to the markets.
Unlike many other BDCs, it does not participate in collateralized loan obligations (CLOs), not is it involved in mortgage loans or mortgage-backed securities (MBS). This limits its risk and provides more transparency to HTGC’s shareholders.
Hercules Capital’s Impressive Portfolio
Hercules breaks down its numerous portfolio companies into four primary groups. The first is life sciences, which includes drug and therapeutic companies. Then there’s general technology, which includes numerous class-leading companies in various businesses. Third is sustainable and renewable energy, and fourth is special opportunity companies.
It currently states that its life sciences companies make up half of its current portfolio. The full list of the current portfolio can be found here. And the rest of its portfolio spans many different technologies.
Hercules has plenty of bold-faced names that it has worked with over the years. It currently assists FanDuel in the increasingly popular sports gaming market. It has BrightSource Energy in its renewables unit, along with American Superconductor (NASDAQ:AMSC).
And Hercules also stands to benefit from the current remote work surge. It has DocuSign (NASDAQ:DOCU) and Evernote, which specializes in cloud document management. It also has innovative food brands including Annie’s and Impossible Foods. For those seeking family information, it has 23andMe and Ancestry.com. Hercules truly has something for everyone.
It’s important to note that the financing isn’t just about making loans to these companies. Hercules also gets equity stakes as part of each transaction, which provides it with gains along the way.
And Hercules doesn’t just sit around waiting for the phone to ring for opportunity. Instead, it is based in the tech mecca of Palo Alto, California. It knows everybody in technology. And it also has strategic offices around the U.S. to help it reach other customers and financial partners.
One office I like is its very special team inside the Washington beltway. The U.S. government provides plenty of opportunities for tech companies, and Hercules works to make things happen for its clients.
And all of the above comes with $7 HTGC stock.
How Is the Lockdown Impacting HTGC Stock?
But what is the status of the company while the U.S. economy is in lockdown? For me, status means how the company is going to get through the mess, and how it will perform moving forward. This includes its employees, which are now working remotely. And it also includes it suppliers, which I will get to in a moment. Lastly, it includes its customers, which are the current and future companies it invests in.
Here I see that tech is becoming one of the value-focused and dependable parts of the stock market during lockdown. Technology is bringing solutions for everything from healthcare to remote work. And that trend won’t stop anytime soon.
Now, let’s look at the credit status of the company. Its debts are manageable at 52.9% of its assets.
And Hercules Capital has a revolving credit line with MUFG Union Bank for working capital that will mature on May 5. It also has a smaller loan maturing in 2022 with another major line of credit. It has placed two mini bonds (bonds that trade like preferred shares) with maturities in 2025 and 2033.
Hercules also has cash and cash equivalents amounting to $64 million. The company recently announced that, with various loan payments and pre-payments, it will have $350 million in liquid assets for its first quarter.
In addition, it placed additional shares last year for $62.7 million, and some in 2018 for $63.3 million. These two offerings were part of the company’s at-the-money capital program of 12 million shares. It has another placement of additional capital which is set to close in June for an additional $70 million.
For now, after reviewing its status, I think Hercules Capital and HTGC stock are in pretty good condition.
The Bottom Line on HTGC Stock
Hercules distributes dividends both in regular amounts (currently 32 cents per share) and in a special distribution through the year. It paid one of those special distributions of 8 cents on March 9. That brings the annual dividend to a whopping 20.2%. Remember, HTGC stock trades below $7.
Under generally accepted accounting principles (GAAP), the cash available for shareholders was $44.6 million and total dividend distributions came in just under $37 million. And its reported retention rate for earnings is at 22.7%. Of course, both of these details are backward-looking, but they give you an idea of its coverage and reinvested capital.
And, as Hercules is reporting expectations for heavier cash and liquid assets, the dividend may well remain. Granted, a lot is going on in the economy. But the company survived credit-threatening times before, including the 2007-08 financial crisis, so it has proven its chops.
Another thing I like is that its management team, board of directors and other insiders own 4.7% of the company’s overall shares. Management has skin in the game with HTGC stock.
Hercules Capital Book Value Per Share
HTGC stock is now below $7, so it is valued at a discount of 30% of the company’s $10.55 book value. This makes it a bit of a bargain right now.
I have the shares as a buy ideally in a taxable account under $9.60.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine … one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.