Last week I made a commitment to fill out the remaining positions in our model portfolio by the Fourth of July. Today, I'm going to give you two new recommendations and tomorrow I'll follow with another.
All three of these recommendations are timely, especially now that the bond market has settled down after a volatile week. I wanted to be a little patient and make sure the 5.25% yield on the key benchmark 10-year Treasury note held going into today -- and it has. Those tame core inflation numbers released late last week provided the bond bid we were looking for.
That said, let's position the two names below alongside our other 27 holdings (and with the one I'm adding tomorrow) we'll bring our portfolio up to a total of 29 holdings. In doing so, we will be about 90% invested and on target to be fully invested by the July 4. So let's get to work and buy some stock.
I recommend taking a full 3% position in shares of Hercules Technology Growth Capital Inc. (HTGC). HTGC is the leading publicly traded specialty finance company offering senior and subordinated working capital loans, senior revolving loans, bridge loans and equipment loans. It also offers direct equity investment exclusively to privately-held growth companies backed by top-tier venture capital and private equity firms at all stages of development. This type of financing is commonly referred to as "venture lending" or "venture debt," and is also known as "structured mezzanine financing."
Hercules Technology primarily focuses its investments on companies active in the technology and life sciences industries. Examples of its areas of interest in the technology-related sectors include computer software and hardware, networking systems, semiconductors, semiconductor capital equipment, information technology infrastructure, Internet consumer and business services, and telecommunications. HTGC's areas of interest in the life sciences sectors include medical devices, biotechnology and pharmaceuticals, healthcare services and healthcare information technology.
First-quarter sales and profits were strong year-over-year, and management provided robust guidance for the balance of 2007. Here are the details of HTGC's Q1 2007 performance:
What we have here is another nimble Business Development Company that specializes in high-tech and life-sciences investments. By paying out a dividend yield that pushes 9%, we have an ideal tech component for our model portfolio that is a wonderful complement to our other specialty finance holdings.
Hercules' stock came off its high following the announcement of a secondary offering of 8 million shares and has been trading an average of more than 500,000 shares per day for the past two weeks.
Buy Hercules Technologies Growth Capital Inc. (HTGC) here around $13.50 if you're able to -- if the stock reaches $15, wait for a pullback.
Current Price: $13.50
52-week range: $11.11 - $14.71
Target Price: $18
Dividend Yield: 8.9%
Dividend Payout (Annual): est. $1.20
Payout Frequency: Quarterly
Ex-Dividend Date: est. Aug. 14
Div. Payment Date: est. Sept. 18
Market Cap: $312 million
Some of the juiciest dividend yields are being paid out by the Specialty Finance Real Estate Investment Trusts (REITs). It's a sector I wrote about at length in the June issue of The 25% Cash Machine.
This sector has been penalized by problems in the subprime lending arena, yet the REITs we already own have little or no exposure to subprime lending -- and that's equally true of this company, so I recommend you take a full 3% position in shares of RAIT Financial Trust (RAS).
As the housing market continues to grope for a bottom, the business of refinancing and swapping structured commercial paper is alive and well, and that provides excellent top- and bottom-line growth to those (relatively few) publicly traded entities that custom tailor their portfolios to the reflect the strengths in commercial real estate lending.
RAIT Financial Trust operates as a self-managed and self-advised REIT. The company provides a set of debt financing options to the real estate industry, and primarily originates and invests in a long list of various assets:
RAIT Financial qualifies as a real estate investment trust for federal income tax purposes and generally would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to stockholders. On Thursday, June 14, RAS announced it is increasing its quarterly dividend by 5% to 84 cents per share. This now translates to a forward dividend yield of 11.3%.
Despite a troubled residential real estate market, commercial real estate has done well simply because corporate America is doing well. You just don't see the same irrational lending in commercial real estate that was allowed to occur and fester in the residential market. As such, RAS put up some impressive numbers in Q1 2007. Here are the highlights:
In short, these Q1 results show the high level of skill that management has exhibited during a difficult time. The fact that RAS has raised the dividend payout twice in the past six months is (for me) reason enough to bring them into our fold. In fact, raising its dividend before releasing Q2 numbers illustrates the confidence RAS management has in its current business plan -- and it's well deserved.
Q2 figures won't be reported until the first week of August, so the bump in the dividend now is a nice precursor to what, quite likely, will be another solid quarter for RAS. What's equally nice is that there have been seven open-market purchases by insiders totaling almost $900,000. I'm always pleased when management puts its own hard-earned money behind its stock. It tells me management sees real value in its stock that may not yet be recognized by the market.
Take a full 3% position in shares of RAS here just below $30 if you can get it -- don't pay more than $32.
Current Price: $29.90
52-week range: $25.66 - $38.25
Target Price: $36
Dividend Yield: 11.3%
Dividend Payout (annual): $3.36
Payout Frequency: Quarterly
Ex-Dividend Date: June 26
Watch for tomorrow's Alert with my next recommendation.
Bryan Perry
Editor The 25% Cash Machine