This has been a busy year at Allied Capital Corp., Washington's premier venture capital company. As the banks moved to cut off credit to many businesses, Allied President David Gladstone and his troops stepped in to help. They spent almost six months negotiating new loans and credit lines for about 50 of the companies in which Allied invests.
Once the Allied executives took care of those credit problems, they turned their attention to the growing crowd of entrepreneurs seeking their financial backing and offering them good deals to get money they couldn't obtain elsewhere. In fact, the deals have been coming in so rapidly, Gladstone said, he has rented additional office space and is hiring more helpers to deal with the flood.
"It's boom time for Allied Capital," Gladstone said happily.
Gladstone attributed the gold-rush climate to the erosion of the twin peaks of venture money usually available from the banks and the venture funds.
The money available from venture funds, Gladstone noted, has declined sharply in the last several years after a long period of over-expansion that was followed by slipping returns on investment. And, of course, the banks pulled out after they saw their profits go down the drain with the real estate market.
As a result, Allied Capital finds itself with an opportunity to lock in a large number of good deals that will carry the company well into the 1990s. In fact, the whole climate reminds Gladstone of the recession years of 1981 and 1982, when many of the deals made helped carry Allied through the 1980s.
The influx of deals, Gladstone said, was "a joy and a delight."
While all this was going on, Allied Capital has been in the process of organizing a spinoff to shareholders of its investment advisory division, called Allied Advisory Inc.
The deal is a trifle complicated but the bottom line is that Allied Capital shareholders will get one share of Allied Advisory for each share they now own of Allied Capital.
The new stock is expected to trade on the Nasdaq over-the-counter market along with the shares of Allied Capital (ALLC), and a recent clone called Allied Capital Corp. II. (ALII).
The forthcoming spinoff of Allied Advisory has been cheered by analysts Peter C. Keefe and Michael D. Bulger at Johnston, Lemon & Co. who recently wrote:
"As an independent company, the Allied Advisory subsidiary should be worth between $2 and $3 a share, a value that we believe is not reflected in the current price of ALLC stock."
Gladstone said that shareholders would not notice much change in the Allied operation after the spinoff. "There'll be no change in management, no change in the day to day operations," he said.
And Keefe and Bulger said they believed that the Allied dividend, which is yielding 6.7 percent on an $18.25 share price, will be unaffected by the spinoff.
As the two analysts noted, Allied is really in two businesses. It lends money to small businesses and it is a money manager. At the moment, the various Allied Capital entities have a total of $250 million under management.
This number could rise to $1 billion within five years, Gladstone said. And a good part of that growth could be made possible by the spinoff of Allied Advisory, he said.
Allied has been offered a lot of opportunities to manage money for people who want to find nontraditional investments in the venture area in which Allied specializes. But until now, the structure of the advisory unit has made it difficult to accept those opportunities.
The hope is that, eventually, when Allied Advisory is a stand-alone unit managing large sums of money for a 2.5 percent fee, the flow of profits will be substantial.
Thus, the greatest potential gains for Allied stockholders, including insiders who own 23 percent of the stock, may lie in the future performance of Allied Advisory, whose business role will be relatively easy to understand.
Gladstone acknowledges that he has been disappointed to find that Allied Capital Corp. has traded in a narrow $15 to $20 range during the last several years, despite the continuing growth of profits and dividends. But he also is aware that Allied is a one-of-a-kind company and while it has an exemplary 31-year track record, it is not always easy for financial analysts and investors to understand.
What is easiest to comprehend about Allied is that it has developed an investment strategy that works, more often than not. Allied prefers to put its money in vanilla type businesses, including companies that make archery equipment, musical instruments, refrigerator parts, auto mufflers and pizzas.
Thus far this year, Allied has invested in a company that puts the stripes down the middle of highways, a tank truck company that specializes in orange juice deliveries and a company that operates a chain of lumber yards.
Thanks to the credit crunch, there probably will be many more such deals in the future. And when the spinoff of Allied Advisory is completed later this year, Allied is likely to become a much larger company that it has been in the past.
Analyst William E. Cage Jr. at Wheat, First Securities Inc. in Richmond recommends that short-term oriented investors sell their shares of Baltimore Gas & Electric Co. while longer-term investors hang onto the stock.
"In our opinion, the problems related to the shutdown of the Calvert Cliffs nuclear unit combined with increasing levels of construction spending could weaken the financials at Baltimore Gas & Electric over the intermediate term," he wrote.
Cage added, "We estimate that internally generated funds will cover only 56 percent of planned construction expenditures over the next two to three years. Therefore, Baltimore Gas & Electric will require additional external financing in the form of both debt and common stock."
Cage said that increased rate filings over the next few years could further jeopardize the company's normal levels of financial quality. If that happens, he noted, BG&E would tend to lose the premium valuation it has enjoyed and would tend to perform less well than other utility stocks.
Investors concerned about total return and above-average dividend growth in the next two years, he said, should switch out of BG&E and into other utilities, including Potomac Electric Power Co. of Washington.
Read 'em and weep. The turbulence in the stock market continues to hit hard at Washington area companies. A few companies have seen their stock rise in the last week or two but many more were losers.
The few winners included Riggs National Corp. of Washington, which bought the faltering Washington Bancorporation from federal regulators. Riggs stock moved up from $13 on Aug. 10 to $14.37 1/2 Friday.
Another good performer was Survival Technology Inc. of Bethesda, which benefited from the decision to send U.S. troops to the Middle East after Iraq invaded Kuwait. Survival Technology manufactures an antidote to nerve gas, which could be in great demand to protect U.S. soldiers. The stock, which sold at $10.25 on Aug. 3, closed at $12.75 on Friday.
It was easier, however, to find local companies hitting new lows for the last 52 weeks. Here are Friday's closing prices for some of those stocks that recently made new lows.
Among the financial institutions were Columbia First Savings Bank at $5.75 and Loyola Capital Corp. at $10.25.
Crown Central Petroleum Corp. of Baltimore, which has been unable to raise its prices as fast as the major oil companies, saw both its "A" and "B" shares drop. The "A" shares closed at $25.37 1/2, the "B" shares at $24.62 1/2.
Other stocks hitting new 52-week lows recently, and their closing prices on Friday, included: Marriott Corp., $18.37 1/2; Martin Marietta Corp. $35.12 1/2; Uslico Corp. $20.25, LaFarge Corp., $12.62 1/2, Preston Corp. $8.75, Versar Corp. $2.62 1/2, and Insituform East $3.12 1/2.endquad