Best Stocks for 2020: Hercules Capital Stock Returned 41.5% in Q2 and Is Still Cheap

Buy Hercules Capital stock in a taxable account as long as shares remain below $12.25

Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2020 contest. Neil George’s pick for the contest is Hercules Capital (NYSE:HTGC).

best stocksThe second quarter of 2020 had one of the best returns for the U.S. stock market since 1998. The S&P 500 returned 20.5%, making for a huge rebound from the ghastly first quarter’s plunge. And while the S&P 500 is still in the red by 3.1%, it’s way, way better than that huge plunge resulting in a loss of 33.8%.

But what really performed in the second quarter was the technology sector stocks. The S&P Information Technology Index returned 30.5% for the second quarter. That makes for a near-50% better return than for the general market.

But one of my favorite stocks inside the model portfolios of my Profitable Investing did better than both the general market and the tech market. It also happens to be my pick for InvestorPlace.com’s Best Stocks contest. Hercules Capital (NYSE:HTGC) stock returned 41.5%. And it did so by being at the heart of U.S. technology in Palo Alto, California. In fact, it’s one of the prime companies working to develop technologies — and it cashes in well along the way.

Chart showing Hercules Capital (HTGC) Total Return -- Source: Bloomberg
Source: Bloomberg

Hercules Capital (HTGC) Total Return

Hercules Capital did all this with big price gains and its ample series of regular and ongoing special dividends. HTGC stock has an annual yield of 13.7%. And this isn’t just a flash in the pan for shareholders in this company. Over the trailing 10 years, the stock has returned 186.1% for an annual equivalent return of 11.1%. That provides evidence of a whole lot of dependability.

Hercules Benefits From a Big Lift for Tech

Hercules Capital is an alt-financial company providing finance with equity participation to tech companies in various stages of development. Tech is one of the better forward-looking segments — even through the novel coronavirus. That’s because the sector is providing solutions for more remote commerce, management, as well as life science products and services. Many of Hercules’ highly diversified portfolio companies should continue to advance.

It is structured as an investment holding company, also known as a business development company (BDC) under the Investment Company Act of 1940. BDCs were further codified under the Small Business Investment Incentives Act of 1980. Both of these bits of U.S. law allow the company to largely avoid federal corporate income taxes. In other words, this helps Hercules Capital generate more cash and fulfill bigger dividend distributions.

Hercules is a VC-style firm that focuses entirely on technology and tech-related companies in various stages of development. It provides loans to fund company development as well as asset-based finance. It works with its companies to bring them to IPOs or acquisition by larger firms. And since its founding back in 2003, it has successfully worked with nearly 500 companies, bringing billions of dollars of value to the markets.

Unlike many other BDCs, it does not participate in collateralized loan obligations (CLOs) nor does it involve mortgage loans or mortgage-backed securities (MBS). This limits its risk and aids in its transparency for shareholders.

All About Hercules Capital’s Portfolio

HTGC breaks down its portfolio of companies into four primary groups. The first is life sciences, which includes many drug and therapeutic companies. Then there’s general technology which includes numerous class-leading companies in various businesses and markets. The last two groups are sustainable and renewable energy companies and special opportunities.

Life sciences companies make up about half of its current portfolio. The full list of the current portfolio list can be found here. Other than its life sciences companies, the rest of its portfolio spans tech companies in 16 industry groups.

Hercules has plenty of bold-faced names that it successfully worked with over the years. And currently, it works with companies including FanDuel in the increasingly popular sports gaming market. It has BrightSource Energy in renewables. Oh, and HTGC also has American Superconductor (NASDAQ:AMSC), which is leading in greater power efficiencies.

Another great thing about Hercules is that it’s benefiting from current tech trends. In its portfolio it has  DocuSign (NASDAQ:DOCU) for online contracts and agreements as well as Evernote for cloud document management. And it has innovative food brands including Annie’s and Impossible Foods. Lastly, for those seeking more personal and family information, it also has 23andMe as well as Ancestry.com.

How Does HTGC Work?

So how exactly does it work? To start, know that the financing isn’t just about making a loan to these companies. Hercules also get equity stakes as part of each transaction, and these stakes provide the company with gains as its portfolio businesses progress.

And it just doesn’t sit around waiting for the phone to ring. Instead, Hercules relies on its key location. It is based in the U.S. tech center of Palo Alto, California, so it knows everybody in technology. And it also has strategic offices around the country which help it connect to other customers and financial partners. For example, it has a very special team in Washington, D.C. The U.S. government provides plenty of opportunities for tech companies — and Hercules works to make things possible for its clients.

Hercules doesn’t just stop at financing and equity participation — it also provides guidance as companies develop and mature. In turn, this helps the companies become more profitable for Hercules.

Best Stocks: Pick HTGC for Dividends and Value

HTGC stock is a great pick because of its dividends. It distributes dividends in regular amounts, currently offering up 32 cents per share. But it also has additional special distributions throughout the year, including the 8 cents it paid on March 9. That brings the annual dividend to a whopping 13.7%.

But what really makes for a compelling buy is that the stock is so cheap — even with the big return over the past quarter. Even with all of the embedded technology equity participation and all of the income-generating assets, the stock is valued barely above its intrinsic value. The price-book is only 1.04 times. That compares to the average price-book of the S&P Information Technology Index members of 8.86 times making Hercules a genuine bargain right now. And with the S&P Information Technology’s average dividend yield at only 1.2%, Hercules’ 13.7% is even more of a value proposition.

I have Hercules Capital as a buy ideally in a taxable account under $12.25.

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


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