Ares Capital: I'm Not Bearish Anymore But Still Have Concerns
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Hunting Alphas7.89K FollowersFollow5ShareSaveCommentsSummaryAres Capital’s strong recent deal flow and diversified commitments position it for potential net investment income growth from currently stagnant levels.Nearly a quarter of Ares Capital’s $29.5B portfolio is in software, and its backlog and pipeline suggest this software exposure could rise further.Growing software exposure increases Ares Capital’s vulnerability to AI-driven disruption, especially if agents compress pricing power for traditional software business models.Ares Capital trades at a sizable 1-yr fwd PE to BDC peers that is well above its long-term median relative valuation.Ares Capital sits on major monthly technical support with some signs of stabilization, but convincing buyer strength has not yet emerged. VladimirFLoyd/iStock via Getty Images Performance assessment My recent 'Sell' views on Ares Capital (ARCC) have worked out well: Elevator pitch I'm becoming less bearish now on ARCC, although I still see challenges: Strong deal flow bodes well for future This article was written byHunting Alphas7.89K FollowersFollowI aim to provide alpha-generating investment ideas. I am an independent investor managing my family's portfolio, primarily via a Self Managed Super Fund. My articles deliver 5-Minute Pitches focused on the core fundamental and technical drivers of the security.I have a generalist approach as I explore, analyze and invest in any sector so long there is perceived alpha potential vs the S&P500. The typical holding period ranges between a few months to multiple years.I am very much focused on adding value via alpha generation. I always start with a Performance Assessment section for each follow-up article. I publish unusually detailed analytics on my long-only, zero-leverage global equity portfolio performance on my Hunting Alphas website every month.A bit about how I approach research and coverage of a stock:I build and maintain spreadsheets showing historical data on the financials, key metric disclosures, data on the guidance and surprise trends vs consensus estimates, time-series values of the valuations vs peers, data on key coincident or leading indicators of performance and other monitorables. In addition to the company's filings, I also keep tabs on relevant industry news and reports plus other people's coverage of the stock. In some cases, such as during times of a CEO change, I will do a deep dive on a key leader's background and his/her past performance record.I very rarely build DCFs and project financials many years out into the future as I don't think it adds much value. Instead, I find it more useful to assess how a company has delivered and the broad outlook on the 5 key drivers of a DCF valuation: revenues, costs and margins, cash flow conversion, capex and investments and the interest rates (which affect the discount rate/opportunity cost of capital). In some cases, especially for companies trading at very high multiples on a TTM or 1-yr fwd basis, I do a reverse DCF to make sense of the implied growth CAGR implications.Note: Hunting Alphas is related to VishValue Research on Seeking Alpha.Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.