Introduction

I’m naturally someone who tries to find the good in any situation, even when it comes to investing during high amounts of volatility.

But when a stock is experiencing high volatility, this can be attributed to a number of factors.

In the case of Prospect Capital Corporation (PSEC), a BDC I’ve been bearish on for close to a year, their steep discount and double-digit yield look good on the surface.

But beneath it, deteriorating fundamentals, declining NAV, and a small dividend cut suggest the pain may not be over.

In this article, I discuss Prospect Capital’s latest earnings, what caused the post-earnings sell-off, and why investors should expect more underperformance going forward.

Previous Thesis

I covered Prospect Capital back in September, reiterating them as a sell due to financial deterioration.

Despite the 20% dividend yield and deep discount to their net asset value, weak dividend coverage signaled ongoing financial deterioration and the further potential for investors to see capital loss.

Since the stock is down close to 5% in comparison to the S&P (SP500), it is up over 10% in the past 8 months.

PSEC’s portfolio shift towards more defensive loans and robust liquidity were positives. But I believed these to be too little too late, with more dividend cuts and underperformance likely going forward.

Another PSEC-like Quarter

PSEC’s Q3 earnings looked similar to previous earnings reports. Often times when I say this, it usually means that the company delivered a solid earnings report.

But in the case of PSEC, this meant their Q3 saw more financial deterioration. Net investment income beat estimates by $0.05 but declined from the previous quarter’s $0.19.

Expectedly, this declined on a total dollar amount as well, down 14.3% from $91 million to $78 million.

While BDCs can experience declines on a per-share basis, something