What I'm Watching With Prospect Capital To See If They Beat The Market
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By Leo Sun – Mar 26, 2026 at 10:46AM ESTKey PointsProspect Capital’s stock trades at a steep discount to its NAV per share.But its deteriorating portfolio, constant dilution, and high fees justify that discount.Prospect Capital (PSEC +0.58%), a mid-tier business development company (BDC), pays a whopping forward dividend yield of 20.8%. But over the past five years, its stock price declined 66%. Even with reinvested dividends, it delivered a negative total return of 39%. That dismal performance makes Prospect Capital seem like a high-yield trap instead of a worthwhile income investment, but could it bounce back and beat the market this year? Let's review its business model, major challenges, and valuations to decide. Image source: Getty Images. Why did Prospect Capital's stock plummet? As a BDC, Prospect Capital invests in debt and equity in "middle market" companies that struggle to secure bank loans because they're considered higher-risk clients. In exchange for taking on that risk, BDCs charge higher interest fees than traditional banks. BDCs also need to pay out at least 90% of their taxable income as dividends to maintain a lower tax rate. Prospect Capital holds over 450 investments in its $6.5 billion portfolio, but it's much smaller than top-tier BDCs like Ares Capital (ARCC +0.83%), which manages $29.5 billion in assets. Prospect Capital also holds riskier, lower-quality investments (including structured credit, payment-in-kind loans, equity, and real estate) than Ares Capital, which allocates most of its portfolio to senior secured loans. That's why Prospect pays higher yields than Ares and other BDCs, but it's also riskier and more exposed to the macro headwinds. ExpandNASDAQ: PSECProspect CapitalToday's Change(0.58%) $0.01Current Price$2.62Key Data PointsMarket Cap$1.3BDay's Range$2.60 - $2.6352wk Range$2.45 - $4.21Volume43KAvg Vol4.5MGross Margin-575.13%Dividend Yield20.77% To gauge a BDC's quality, we look at its net asset value (NAV) per share. But from fiscal 2020 to fiscal 2025 (which ended last June), its year-end NAV per share declined from $8.18 to $6.56. That figure dropped to $6.21 by the end of the second quarter of fiscal 2026. Prospect's exposure to smaller, riskier companies backfired over the past five years, as inflation, high interest rates, geopolitical conflicts, and other macro headwinds rattled the global economy. As a result, it racked up losses, marked down its investments, and saw its NAV crumble. At the same time, Prospect constantly issues additional shares at a steep discount to its NAV, further diluting its existing investors, while charging high fees pegged to its total assets under management rather than its total shareholder returns. In other words, Prospect's management is incentivized to simply expand its portfolio rather than optimize it for long-term gains.
Could Prospect Capital beat the market this year? I don't think Prospect Capital will come anywhere close to matching the market this year unless it stabilizes its NAV, stops issuing more shares at a discount, and rethinks its fee structure. Until then, bigger and more disciplined BDCs like Ares Capital will remain much better investments.Read NextMar 26, 2026 •By Bram BerkowitzThe Market Is Worried That Private Credit Is the Next Shoe to Drop. 5 Things Investors Need to Know.Mar 26, 2026 •By Matt DiLalloThis Elite Wealth-Creating Machine Is a Screaming Bargain These DaysMar 26, 2026 •By Bram BerkowitzBillionaire Seth Klarman Recently Sold 41% of the Baupost Group's Stake in Alphabet and Piled Into an Embattled Fintech Stock Down 75% Over the Past YearMar 26, 2026 •By Neil PatelIf You'd Invested $10,000 in Berkshire Hathaway Stock 10 Years Ago, Here's How Much You'd Have TodayMar 26, 2026 •By Neil PatelDown 24% in 8 Weeks, Here's 1 Glorious Stock That Could Realistically Double in 3 YearsMar 26, 2026 •By Sean WilliamsWant $100 in Super-Safe Monthly Dividend Income? Invest $11,955 Into These 2 High-Octane Income Stocks Yielding an Average of 10.04%!About the AuthorLeo Sun is a contributing Motley Fool stock market analyst who has worked with the company since 2013, covering technology, consumer goods, industrial, and financial sectors. He became a self-made millionaire by age 40 through long-term investing, crediting lessons from Warren Buffett and Peter Lynch. Leo is a regular guest on CNBC Asia providing stock analysis on Chinese technology companies, including Tencent, Baidu, and Alibaba. He previously wrote for InvestorGuide and holds a bachelor’s degree in English from the University of Texas at Austin.TMFSunLionX@TMFSunLionStocks MentionedProspect CapitalNASDAQ: PSEC$2.62(+0.58%)+$0.02Ares CapitalNASDAQ: ARCC$18.22(+0.86%)+$0.16*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.