Capital Southwest Corporation
(NYSE:CSWC) shares moved down marginally after Ned Sherwood disclosed a
6.6 percent stake and expressed his belief that the company is trading
well below its intrinsic value and highlighted several concerns it has
about the company's strategy and direction. Shareholders are hoping
that the investor will help push the company to unlock value and jump
its share price.
Mr. Sherwood
disclosed a letter
to the board of directors indicating his belief that the company's
shares are worth between $175 and $200 per share. He believes this
discount can be attributed to, among other things, certain policies and
practices that the company has used in the past and doesn't intend to
change. In his letter, he made several suggestions to unlock value for
shareholders.
One the company's policies causing major concern
is the fact that unlike most Business Development Companies (BDCs), the
company has chosen to retain its realized gains rather than distribute
it to shareholders. The company's BDC structure enables it to pass all
tax liability to shareholders who would have to pay a 15% tax; however,
by retaining all income, the company is forced to pay the 35% corporate
tax rate!
Moreover, the company has chosen not to exercise its
registration rights on its four most significant holdings in public
companies so such shares can be freely traded on the open market. The
company's venture capital investments have resulted in significant
security holdings that it has refused to sell or exercise in the free
market. Clearly, the growth isn't there to justify holding them.
These
two policies alone caused a reduction of $100 per share from the
company's net asset value, which stands near $233! There are also other
problems such as the company's excessive extra cash and credit lines
that are being unused. If this were returned to shareholders through a
buyback or special dividend, we could see substantial gains in share
price. Combined, these factors make CSWC a stock
worth watching!
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