"With merger and acquisition activity heating up, biotech is one of the few corners of the market that's looking healthy," says Carla Pasternak.
In her High Yield Investing, she adds, "As a company that invests in biotech start-ups, Hercules Technology Growth Capital (NASDAQ: HTGC), is at the center of the action."
"Investors looking to cash in on biotech takeovers are naturally trying to identify the next potential target.
"But there's a more direct way to profit than gambling on the next possible prospect – invest in Hercules Technology.
"Since inception in 2003, this Silicon Valley financier has committed about $1.3 billion in debt and equity to 120 different life science and technology firms.
"Even in today's tight credit markets, it has secured up to $300 million in credit and continues to build a profitable portfolio of biotech and other technology-related businesses.
"And profitable it is -- amid a worldwide slowdown, this firm is firing on all cylinders. It's raking in record investment income and is expected to see double-digit earnings growth next year.
"But the best news is that thanks to a recent 13% dividend boost, today the shares carry a juicy yield of nearly 14%.
"Like many of you, we tend to be wary of double-digit yields in this market, but this is one high-yield stock we think is well worth considering.
"Hercules is like a publicly traded venture capitalist. It lends money and takes an equity stake in promising start-ups that are on the way to being sold or taken public.
"Hercules' loans have a built-in safety net in that the company only works with businesses that are already sponsored by a venture capital or private equity firm. Its job is to provide some extra cash to tide them over until the next round of financing.
"As a BDC, Hercules must distribute at least 90% of its taxable income to shareholders every year. BDCs are tax-exempt since they pass along most of their income to shareholders.
"As a result, dividends are generally taxed at the ordinary income tax rate, and the shares are best held in a tax-deferred IRA type of account.??
"Since going public in mid-2005, Hercules' investment portfolio has rapidly expanded, along with sales and earnings. Sales have increased five-fold, from $11 million in 2005 to $54 million in 2007.
"Meanwhile, net investment income per share has quintupled from $0.22 to $1.14 over the same period.?
"Based on the company's strong first-half results, it's expected to see per-share earnings grow an estimated 16% next year to about $1.38 after gaining about +4% this year. ??
"BDCs must keep their debt-to-equity ratio to no more than one -- meaning for every dollar of equity there can be no more than one dollar of debt. With a ratio of just 0.53 times, well below the required limit, Hercules still has considerable room to grow its loan portfolio. ??
"We believe the company is suitable for a relatively aggressive investor willing to bet on promising high-growth technology firms in an uncertain economic environment in return for capturing a solid double-digit yield."