ARCC - Ares Capital: Competition Weighs Down On Yields And Margins

2024-06-13 19:09:37 ET

Summary

• Ares Capital has played out as per my expectation since my last update, as it has underperformed the S&P500 by 3.61%. I continue to be bearish on the BDC.
• On the plus side, deal activity is improving. Fundings, commitments and backlog + pipeline figures all show a healthy rebound.
• But Ares Capital's yields and net investment income margins are under stress. Increased competition is making it difficult for the BDC to get its fair share of high-yield investments.
• Valuations are on the premium end, reducing the margin of safety for buys. Technical analysis vs the S&P500 suggests continued underperformance ahead for multiple quarters to years.

Performance Assessment

Since my last update on Ares Capital ( ARCC ), ARCC has delivered a total return of +9.96% vs the S&P500's ( SPY ) ( SPX ) +13.57% over the same period, leading to underperformance over the market index of +3.61%. Thus, I deem my 'Strong Sell' view to have been correct....

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