American Capital (ACAS – Nasdaq)

Dear Bottarelli Research Member,

Make no mistake: Last week’s sell-off was a bloodbath.

In every sector we follow, banking fears and economic jitters resulted in panic selling across the board. As Bryan said in his options service, there’s absolutely no “safe-haven” right now. Everything is getting hit.

It’s easy to understand the reason for this nervous trading. Lehman Brothers (LEH – NYSE) is on the brink of insolvency. Washington Mutual (WM – NYSE) trades under $2.00 per share. And according to The Financial Times, in the 36 years that Merrill Lynch (MER – NYSE) has been a public company, it has achieved cumulative profits of $56 billion. But over the past 18 months, MER has lost $14 billion, representing 25% of the profits they’ve achieved over their 36-year time span. This shocking figure truly puts our current financial crisis into perspective – and I didn’t even mention the bailout of Freddie Mac and Fannie Mae, which wiped out millions from investors and mutual funds alike!

This will go down in history as the day the U.S. nationalized home lending, and tax payers like you and me (without recourse) must now shoulder the burden. That means that the ridiculous and reckless lending practices that swept through the greedy financial industry are now being bailed out by average tax-paying Americans – most of whom are already struggling with the high cost of gas, energy, and food. That’s hogwash, if you ask me.

But if you’re looking for a positive spin on all of this negativity, the Freddie and Fannie bailout could signal the end of the housing crisis. It’s still too early to tell, but I firmly believe this will be a positive move for builders and homeowners alike. For the first time in a very long while, only the people who can actually afford a home will be lent the money to buy one. It’s pretty sad that it took the largest bailout in U.S. history to remind financial institutions across the country the basic principles of lending money, but that’s what we have right now.

And this leads into today’s newest small-cap pick…

You see, the banks and lenders who were smart enough to stick to their old-style lending practices, which required good credit, steady income, and money down, will soon emerge as the next big winners in the financial sector.

Folks, these are the kinds of lenders who will lead the way forward. Not only will they have the clout and money to lend, but they’ll also be dealing only with those who are worthy and can afford to pay back their debt obligations under the present terms and conditions.

So this week, I have a very unique small-cap investment that is involved in lending – but lending that is completely different than anything you’ve heard of.

Most of their lending is done on commercial-type paper, and only if their criteria is met for flexible financing terms. This gem also takes an equity participation in combination with any monies they lend to a business, which is something that stacks the odds squarely in their favor.

You see, this company is able to package up their equity stake and sell it at a profit anytime they have a suitable buyer. And as you’ll see, these flexible terms have allowed them to achieve strong business operations throughout our recessionary business environment.

On top of that, they’ve also been paying out a very handsome dividend every year since their inception in 1997. As I write, this company is kicking out an 18% dividend, which is remarkable in today’s environment. Plus, they just announced strong earnings, and they’ve been adding some extremely high growth business ventures to their arsenal.

The P/E is very attractive (currently under 8!) and the stock is trading close to its yearly low. I’ve done extensive due diligence, and this company is on very solid footing.

At a time when standard lending companies are reducing their exposure, this company can pick over the cream of the crop and choose only the very best companies to have in their business portfolio – all of which comes with flexible financing terms.

I firmly believe that the lending tide is about to shift course, and that’s exactly why we need this type of investment in our small-cap portfolio right now. And on that note, this week’s pick is American Capital (ACAS – NASDAQ).

As I have outlined above, there is a big shift coming in money being lent out, and private funding is going to be the answer. By taking equity positions and charging for their monies, ACAS has the best of both worlds. With a powerful dividend on our side, ACAS is a buy under $23.00.

UPDATES

Foster Wheeler (FWLT – NASDAQ): It amazes me that quality companies like FWLT are being taken out to the woodshed and beaten up so badly. This company is not going away, and their backlog of projects should protect years worth of profits moving forward. Infrastructure is not going away, and I say this latest sell off is a gift. I’ve been adding to my own personal position, and I recommend that you do the same. Buy/Hold.

Companhia Vale do Rio Doce Vale (RIO – NYSE): Same story here. RIO is currently trading at a value that is hard to fathom. RIO is one of the finest companies you could ever own. If you have yet to pick it up, this is the time to buy. I very rarely say “strong buy” but this one truly qualifies. Strong Buy!

Brigham Exploration (BEXP – NASDAQ): One of our two Bakken Oil plays has actually been holding up very well compared to other drillers. With the projects they are involved in, we could expect news from them on any given day about another resource discovery. We have done well with BEXP, and will continue to do well as they turn their drills into the ground. Hold.

Northern Oil & Gas (NOG – AMEX): Our second Bakken oil play has pulled back hard. As you know, we sold our first round for 75% gains, and now we are just awaiting news from any of the 30 additional wells permitted to be drilled in 2008. With BEXP as a partner, NOG is another screaming buy. Buy.

XTO Energy (XTO – NYSE): They reported that they’ve hedged 50% of their output going out to 2010 for very attractive prices, which is a very good thing. They’ve also completed the merger of privately-held Hunt Petroleum Corporation, which is a very nice franchise. If you have yet to get on board with XTO, this is a great chance for you to do so. Buy/Hold.

Seadrill (SDRLF.PK): Like many of the oil drillers, Seadrill has taken a nose bleed. But I truly believe that oil prices will not remain this low for much longer, so it may be time to double down. With shares trading close to their yearly lows, add to your position now. Buy.

On that note, enjoy your weekend, and we’ll keep close tabs on this commodity sell off. You know the importance of food sources, which suggests to me that this is just a temporary down-turn. And until next week, be sure to give thanks for the abundance in your life.

Sincerely,

The Next Stage in the Financial Crisis Actually Means Strong Business for This $22.00 Stock

Today’s alert begins with a discussion of a man named James Chanos.

Born in Milwaukee in 1958, James is the president and founder of Kynikos Associates, a New York City investment company focused on short selling.

In terms of his methodology, James focuses on the fundamentals of a company before betting if its stock would drop in value. And over the years, his willingness to do in-depth research and expose shady accounting allowed his short-selling firm to survive and prosper despite the raging bull market of the 1990s.

Only after months of due diligence would James enter into a short position. But when he did uncover a stock he thought was set to fall, he’d enter a substantial short position and hold onto it for a very long period of time.

In October of 2000, Chanos began investigating Enron Corporation – and he discovered that their “mark-to-model” accounting system was over-stating their true financial numbers. As a result, Mr. Chanos became one of the very first short sellers of Enron stock.

As 2001 progressed, more and more suspicious information surfaced. And soon enough, Enron’s scandal blasted wide open and the stock plummeted. And as a heavy short-seller, Kynikos Associates achieved tremendous profits. Chanos himself became somewhat of a mini-celebrity thanks to his early probe into Enron’s problems.

But the story doesn’t stop there. Even more recently, Chanos took heavy short positions in the financial sector, making another round of stellar profits as the entire sector has fallen precipitously. This was another brilliant short-play.

But here’s what I find rather interesting…

In a CNBC interview from September 10^th, Chanos said that he is now only short 12% financials. In other words, he has now taken profits on 88% of his short position, leaving only 12% of his total position open. In my view, this single fact offers us a strong indication that we’re getting awfully close to the end of the financial crisis. And if that’s the case, then our timing on a pick like American Capital (ACAS – NASDAQ) could not be any better.

You see, American Capital is the only private equity fund in the S&P 500. They’re also the largest alternative asset management company in the S&P 500 as well.

Both directly and through their global asset management business, American Capital originates, underwrites, and manages investments in private equity, leveraged finance, real estate, and other structured products. They currently have $20 billion in capital resources under management, and they typically invest $5 million to $800 million per company in North America.

In terms of performance, American Capital shareholders have realized a total return of 266% since the company’s IPO, which comes out to an annualized return of 13%. Plus, they just released an impressive Q2 performance report, which is summarized in the table below.

Summary of the Q2 2008 Exit Proceeds

The highlights of this report are outlined below…

BP WEST: American Capital recognized a gain of $69 million in the second quarter of 2008 from the sale of its portfolio company BP West (the holding company for Anchor Drilling Fluids USA). Anchor is the nation’s largest independent provider of drilling fluids and fluid-handling services for onshore oil and gas drilling. For American Capital, the gain totaled $139 million over the life of the investment.

PRIMROSE SCHOOLS: In the second quarter of 2008, American Capital realized a gain of $16 million from the sale of PHC Acquisitions (the parent of Primrose Schools). Primrose is a leading franchisor of early childhood education in the upscale child care industry demographic. American Capital has now realized an aggregate gain of $18 million, earning a 30% compounded annual rate of return on its investment.

TECHNICAL CONCEPTS HOLDINGS: In the second quarter of 2008, American Capital realized a gain of $11 million from the sale of its portfolio company Technical Concepts Holdings, LLC. Technical Concepts is a global designer and marketer of “touch-free” automated products for hygiene and odor control in “away from home” restrooms. In February 2003, American Capital originally invested $33.5 million to support Liberty Partners’ acquisition of Technical Concepts and earned 20% over the life of the investment.

US EXPRESS LEASING: In the second quarter of 2008, American Capital realized full repayment of $37.5 million on its senior subordinated debt facility to US Express Leasing, an independent small-ticket equipment leasing company that provides financing for healthcare, technology, office products, graphic arts, and commercial and industrial equipment. The company earned a 13% annual rate of return over the life of the investment.

Remember, this list of deals just includes those that resulted in profits in the second quarter of 2008. To get a better sense of the size and scope of American Capital’s business operations, here’s a quick look at the companies they’ve invested in dating back to 2006.Skim through the list below and you’ll get a full sense of American Capital’s operation:

• 7/2008, Contec, LLC: Leading repairer of cable set-top-boxes in North America.
• 6/2008, Affordable Care, Inc: A dental practice management services company that supports a network of affiliated dental practices providing removable prosthetics and related services.
• 5/2008, Core Business Credit: A newly-formed commercial finance company that provides asset-based financing to middle market companies nationally.
• 5/2008, Qioptiq Group: A leading designer, developer, and manufacturer of high-precision optical solutions for the defense, medical, and industrial markets.
• 1/2008, NextPoint: Developer of the Universal Convergence Gateway, which provides core security hardware for converged wireless and wire-line networks.
• 1/2008, CIBT Holdings, Inc: The world’s largest expeditor of short-term visa, passport and other documents for business and leisure travel.
• 1/2008, Avalon Laboratories: Leading supplier of disposable cardiopulmonary vascular cannulae, which are medical devices that provide connections between patients and life support machines.
• 12/2007, Ranpak Corporation: Leading manufacturer and marketer of paper-based “in-the-box” protective packaging systems and materials.
• 12/2007, New England Confectionery Company: The oldest multi-line confectioner in the U.S. with well-recognized, nostalgic brands such as Sweethearts Conversation Hearts, NECCO Wafers, Clark Bar, Haviland and Mary Jane American Capital Buyout undisclosed.
• 12/2007, Tanenbaum-Harbe: Insurance brokerage and risk management consulting, employee benefits brokerage.
• 12/2007, First Capital: Leading provider of secured, working capital financing for middle market companies.
• 12/2007, iTradeNetwork: Provider of hosted software solutions and services for the food industry.
• 12/2007, Republic Financial Corporation: An investment firm with four primary business groups: Special Assets, Structured Finance.
• 11/2007, Sixnet Holdings: Manufacturer of industrial automation, data-acquisition, control and connectivity products designed for harsh conditions.
• 11/2007, SunFuel Midstream: A company which will acquire, build, finance and operate midstream bio-fuel infrastructure assets.
• 11/2007, Dynojet Research: Developer of after-market performance products and diagnostic tools for the motorcycle and automotive industries.
• 11/2007, Rug Doctor: Manufacturer and marketer of premium steam cleaning carpet care machines rented and sold to consumers.
• 10/2007, Nivel Parts & Manufacturing: Distributor of aftermarket golf car replacement parts and accessories.
• 10/2007, Imperial Supplies: A value-added distributor of after-market components to fleet and facility-based markets.
• 8/2007, HomeAway Vacation Rental Homes: Online listing marketplace for vacation rental properties.
• 8/2007, SAV Holdings: Largest outsourced provider of audio and visual equipment and related technical support services to hotels and resorts.
• 7/2007, TransFirst Holdings: Provider of transaction processing services and payment technologies.
• 6/2007, Fleischmann’s Vinegar: Leading manufacturer and marketer of industrial vinegar in North America.
• 6/2007, Spring Air Company: Leading manufacturer and distributor of mattresses.
• 6/2007, Vision Solutions: Leading developers of high availability (HA) software.
• 6/2007, Oceana Media Finance: A newly-formed specialty finance company that provides asset-backed secured financing for the production and marketing of independently produced feature films.
• 6/2007, SMG: Leading provider of entertainment and conference venue management services worldwide.
• 6/2007, triVIN: Leading provider of title management services to automobile lenders and electronic vehicle registration services to automobile dealers.
• 6/2007, Imaging Business Machines: Leading provider of high speed, intelligent document scanning hardware and software.
• 5/2007, III Exploration II LP: An oil and gas limited partnership in the exploration and production of reserves in the Uinta Basin of northeastern Utah the Raton Basin of southern Colorado.
• 5/2007, HALT Medical: Medical device company focused on women’s health.
• 4/2007, Paradigm Precision Holdings: Leading machining supplier of precision aerospace components for jet engine manufacturers.
• 4/2007, Appleseed’s: Leading direct marketer of women’s apparel.
• 3/2007, Cinelease: Supplier of lighting and grip equipment to the television, feature film, commercial, music video, and event industries.
• 3/2007, CAMP Systems International: Leading provider of subscription-based maintenance tracking information services to the corporate aviation market.
• 3/2007, Moxy Media: Internet publishing company.
• 1/2007, Velocity Financial Group: Newly formed specialty finance company that will provide equipment financing and working capital to middle market and venture-backed companies.
• 1/2007, Explorer Pipeline Company: The owner and operator of the second largest refined liquid petroleum products pipeline in the United States.
• 1/2007, WIS International: Leading global provider of outsourced inventory management services.
• 1/2007, J-Pac, LLC: Leading supplier of medical contract manufacturing, assembly and packaging services.
• 12/2006, Pacific Handy Cutter: Leading designer, manufacturer and marketer of branded razor cutting tools with enhanced safety features for the store supply and safety market.
• 12/2006, TestAmerica Holdings: Leading operator of environmental testing laboratories in the United States.
• 12/2006, Coghead: Provider of a Web-based platform that enables businesspeople who are not programmers to create and deliver their own Web-based applications.
• 11/2006, Venus Swimwear: Leading direct marketers of women’s apparel.
• 10/2006, CreditCards.com: Internet lead generation and marketing organization that operates a top-ranked website where consumers can search for, compare, and apply for credit cards.
• 10/2006, Narus: Provider of the only carrier-class, real-time Internet Protocol (IP) traffic analysis system.
• 10/2006, eLynx: Leading provider of secure electronic document delivery solutions to the mortgage industry.
• 9/2006, National Processing Company: Largest merchant acquirer focused on the small-to-medium merchant market.
• 9/2006, Small Smiles Holding Company: Holding company formed to acquire Sanus Holdings Inc., a leading dental practice management company.
• 9/2006, Jones Stephens: Designer, brander and distributor of specialty plumbing components.
• 9/2006, Axygen: Leading manufacturer and distributor of high quality life sciences plastic consumables, liquid handling products and bench-top laboratory equipment.
• 9/2006, Marina Medical Billing Service: Leading provider of revenue cycle management services for hospital emergency department physician groups.
• 8/2006, BondDesk Group: Largest electronic trading system focused on odd-lot fixed income transactions.
• 8/2006, Berry-Hill Galleries: Leading New York-based fine arts galleries.
• 8/2006, Scientific Protein Laboratories: Leading global independent manufacturer and supplier of biologic active pharmaceutical ingredients.
• 8/2006, Tymphany Corporation: Provider of innovative audio transducers.
• 7/2006, Aspect Software: Leading provider of contact center software solutions for businesses worldwide Mezzanine in Private Equity Buyout $20,000.
• 7/2006, Pan Am International Flight Academy: Leading provider of simulator-based flight training to commercial airlines and professional pilots.
• 5/2006, Fruit Patch: World-wide distributor of nearly 200 different types and varieties of fruits.
• 5/2006, United Food Group: Value-added processor of fresh, frozen and fully-cooked beef products.
• 5/2006, CMX: Diversified provider of design and engineering services.
• 5/2006, FreeConference.com: Provider of toll and toll-free audio conference calling services.
• 4/2006, Barton Cotton: Leading provider of integrated direct marketing fundraising services to non-profit organizations.
• 4/2006, The Algoma Group: Manufacturer and distributor of high-end customized architectural wood doors for the commercial and institutional building markets.
• 3/2006, Innova Holdings: Leading manufacturer of ruggedized printed circuit boards for the oilfield services industry and other technologies designed to operate in difficult environments.
• 3/2006, AAMCO Transmissions: Leading U.S. transmission repair chain.
• 2/2006, The Meadows of Wickenburg: Premier multi-disorder inpatient facility specializing in the treatment of a broad range of addictions.

When you look at a list like this, you see a very well-diversified company. More importantly, you see a company that’s able to provide liquidity to businesses in times where homes prices have fallen over 10% (the most since the great depression) and equities have collectively fallen 20% (or more) across the world.

Now that the financial crisis has spread to almost every asset class in the U.S., you’ll see a new wave of financing going forward. And American Capital will have the pick of the litter on middle-market businesses, ranging from $10 million to $800 million per transaction.

Since no other financial institutions are willing to provide capital to these types of private companies, this opens up a tremendous investing opportunity for investors like you and me. After all, the recent financial weakness has caused shares of ACAS to push lower – and we’re going to scoop them up for dirt cheap.

And going forward, you’ll quickly see that ACAS represents the next wave of winners that’ll come out of this financial crisis. Their asset quality, combined with their 18% dividend, is more than enough to warrant a strong investment thesis. Then add in their $4.51 billion market cap and their Forward P/E ratio of 7.74, and you can see that adding ACAS shares to our ledger on this dip is a very strong entry price.

Therefore, let’s go ahead and add ACAS to our small-cap portfolio now!

PLAY: Buy shares of American Capital (ACAS – NASDAQ) at or under $23.00, good for the week.

Sincerely,