Getting Out of Hercules Technology

HTGC

Hercules Technology Growth Capital (HTGC) was favorably mentioned in some of my books.  It was a staple holding for me for around a decade.  I heard a radio interview with the founder some years ago and was impressed that he wanted to bring venture capital-like opportunities to regular investors.  I have sold it and no longer recommend it.

The disaster on the chart above would be enough.  It is unprecedented, if not for the magnitude, then for the surprise.  Confirmation was present in a second day follow through.  It might rebound a little, but then so did Countrywide Savings and Novastar Financial, lasting for several years before the final bankruptcy.  Financial companies are just too tempting to management to run scams, and it looks like that is happening to HTGC.

The first day’s drop was apparently precipitated by the announcement HTGC management would no longer work for HTGC, but for an outside management company wholly owned by the founder.  His interests would be aligned with the management company, not HTGC.  While not approved yet, shareholders do not have a record of voting their own interests with this company, and even if they did, apparently the company has already lost the founder’s true interest.  See article at The Motley Fool.

The very next day, adding insult to injury, the company reported a surprise 7 cents a share loss against a Wall Street expectation of 29 cents profit.  Companies whose business is to lend money are not supposed to have surprises, and when they do, it is really bad news and likely to continue.  Some of them like ARCC and even AGNC can bounce back from it, eventually, but I do not want to wait several years, especially with the change in management.  See announcement at Yahoo Finance.

HTGC dividends are around 8% presently.  Assuming they continue, now uncertain, they are non-qualified, so you can do better.  The “illusion” of capital growth, implied in the name, has run its course with the decline of the last two days.  The founder seems to want to convert it into a “growth” company.  But the ownership arrangements of the management company do not suggest he will remain focused on that.

I suggest instead Dynagas, DLNG, paying 10% fully qualified dividends.  In a non-taxable account, you can hold AGNC, or if able to mentally handle volatility, MORL (which pays 17% but typically declines 4-5% a year for a net of 12-13%, often more).

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