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On Aug 21, 2013, we reiterated our long-term recommendation on Hercules Technology Growth Capital, Inc. (HTGC - Analyst Report) at Neutral. Our decision rests on its strong capital position and improved capital deployment activities. However, its investment and credit management strategies remain concerns.

Why the Neutral Stance?

Hercules’s second-quarter 2013 DNOI came in at $0.32 per share, beating the Zacks Consensus Estimate of $0.26. This also compared favorably with the year-ago DNOI of $0.28. Better-than-expected results were mainly driven by an improvement in total investment income, partially offset by higher expenses.

The Zacks Consensus Estimate went up by 5.5% to $1.15 per share over the last 30 days. Moreover, for 2014, the Zacks Consensus Estimate went up by 5.0% to $1.27 per share over the same time frame. Strong estimate revisions helped it achieve a Zacks Rank #2 (Buy).

Hercules’ capital deployment activities have been impressive. In Aug 2013, Hercules hiked its quarterly cash dividend by 3.7% to 28 cents per share. Previously, in May 2013, the company hiked its quarterly cash dividend by 8.0% to 27 cents per share.

Prior to this, the company increased its quarterly dividend by about 4.2%. All these activities are expected to boost shareholders’ confidence.

Moreover, the venture capital market for technology-related companies is active and showing signs of improved investment activity. Therefore, a specialty finance company like Hercules is expected to receive attractive returns by providing venture capital to such companies.

On the other hand, its focus on early-stage venture companies can act as a headwind, if the products of any of its investment companies fail or the companies are unable to manage additional funding from outside. This in turn can restrict the company’s access to the capital market.

Further, Hercules’ investment activities are primarily concentrated in the U.S. based companies. Following the latest financial crisis, the U.S. market has been experiencing illiquidity in the debt capital markets. Though the economy is recovering, an uncertain interest-rate environment and persistent regulatory constraints may lead to increased costs of funding.

Other Banks to Consider

Some other financial stocks worth considering include First Interstate Bancsystem Inc. (FIBK - Snapshot Report), Firstbank Corp. (FBMI - Snapshot Report) and Mercantile Bank Corp. (MBWM - Snapshot Report). All these carry a Zacks Rank #1 (Strong Buy).

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