PSEC

Prospect Capital ($PSEC) CEO Buys $70M in Stock Amid 41% Price Plunge...Strong Undervaluation Signal?

09/24/2025 20:06

Prospect Capital Corporation ($PSEC) is a leading Business Development Company (BDC) specializing in middle-market investments, managing approximately $7.2 billion in assets while providing debt and equity financing to U.S. and Canadian companies with EBITDA ranging from $5 million to $150 million. The company maintains a diversified investment portfolio across sectors including energy, manufacturing, healthcare, software, and real estate, while also actively investing in multifamily residential properties, positioning itself as a comprehensive investment firm beyond traditional lending. Investors need to immediately focus on the stark contrast between plummeting stock prices and management's massive share buybacks. $PSEC's stock price has plunged 41% over 18 months, from $4.70 in June 2024 to $2.76 in September 2025. The stock experienced four major declines of 13-19% each in August and November 2024, and April and July-August 2025, raising significant investor concerns. However, amid this price decline, CEO John Barry has aggressively increased his purchases. He bought 5.8 million shares (~$30 million) in August-September 2024, 5.04 million shares ($23 million) in November, 2 million shares ($8.58 million) in December, 2.79 million shares ($12 million) in March 2025, 940,000 shares ($3 million) in June, and recently 370,000 shares ($1 million) in September. In total, he purchased 16.94 million shares worth approximately $70 million. All transactions were executed under pre-planned 10b5-1 programs, demonstrating systematic and strong management conviction. This management behavior isn't mere posturing. $PSEC has continued aggressive business expansion this year. In October, it extended and increased its existing credit facility to $2.1 billion, announced the $115 million acquisition of QC Holdings in April and completed it in July. In September, it invested $18 million in The Ridge, continuing portfolio expansion. Financially, an interesting contrast emerges. While accounting net loss reaches $594 million with a -65.32% margin, levered free cash flow showing actual operating cash generation recorded a $170 million surplus. This reflects BDC characteristics where non-cash losses or fair value adjustments significantly impact net income. ROA of 4.15% also maintains healthy levels, demonstrating sound actual business operating capability. Particularly noteworthy is the 20.85% dividend yield. Maintaining such high dividends despite net losses is possible due to the structural characteristic requiring BDCs to distribute over 90% of taxable income as dividends, alongside actual cash generation capability differing from accounting losses. The debt-to-equity ratio of 45% is also appropriately managed within BDC industry average ranges. The most important variable in evaluating $PSEC's investment attractiveness is the interest rate environment. BDCs primarily lend at floating rates, so revenues increase during rate hikes and decrease during rate cuts. The Fed's shift toward rate cuts in 2025 has created headwinds for the entire BDC sector, identified as a major cause of $PSEC's price decline. However, rate cuts simultaneously reduce middle-market companies' borrowing costs, potentially leading to reduced default rates and long-term portfolio health improvements. The current stock price of $2.76 represents a 40% discount to book value. This reflects the market's considerable concerns about $PSEC's asset value or future profitability. However, the CEO's continuous large-scale purchases suggest management with access to internal information views the current price as significantly undervalued. Looking at future investment scenarios, in an optimistic case, if Fed rate cuts conclude and the economy achieves a soft landing while middle-market companies' credit quality improves, portfolio value could recover. Significant capital gains are possible if normalization occurs from current discounted prices. The base scenario anticipates steady income generation through high dividend yields, with management's active portfolio management preserving asset value. However, the risk scenario to watch is increased middle-market company defaults due to economic recession, resulting portfolio value decline, and deteriorating dividend payment capability. In conclusion, $PSEC presents an attractive opportunity for yield-seeking investors in a situation where market pessimism starkly contrasts with management confidence. However, understanding BDC-specific volatility, interest rate sensitivity, and middle-market credit risks is essential.