Why the Selloff in Prospect Capital Shares Is Overdone

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I recently penned an article here at the Wall St. Cheat Sheet recommending shares of Prospect Capital (NASDAQ:PSEC) because the company was trading well below book value and is raising its dividends. The purpose of this article is to explain why the stock is down on Tuesday and why I think it’s time to load up on shares. At the time of writing, the stock is trading at $9.61 and rising. The brief high-volume selloff stems from Nicholas Financial announcing that the company’s Board of Directors held a special meeting to consider the status of its proposed transaction with Prospect Capital.

The discussion revolves around Nicholas Financial trying to reconsider the deal. As previously disclosed in December, Nicholas Financial entered into an arrangement agreement whereby the company agreed to sell all of its issued and outstanding common shares to an indirect wholly owned subsidiary of Prospect Capital, pursuant to a plan of arrangement (under the Business Corporations Act). But now we have learned that stemming from these talks, the proposed arrangement will not be consummated on or before June 12, as previously anticipated.

In its quarterly report for the first quarter, ending March 31, Prospect Capital said: “[S]taff of the SEC has asserted that certain unconsolidated holding company subsidiaries through which we hold investment in operating subsidiaries should be consolidated and consequently is delaying the effectiveness of our registration statement on Form N-14 related to the deal.”

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