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On Sep 9, we downgraded American Capital, Ltd. (ACAS - Analyst Report) to Underperform based on this private equity and venture capital firm’s dismal second-quarter results.

Why the Downgrade?

Estimates for American Capital have been going down ever since it reported second-quarter results on Jul 30. American Capital’s second-quarter operating income of 16 cents per share lagged the Zacks Consensus Estimate by 9 cents. Operating revenues of $130 million also missed the Zacks Consensus Estimate.

Following the release of the results, the Zacks Consensus Estimate for 2013 has gone down by 11% to 91 cents per share. The Zacks Consensus Estimate for 2014 has also declined by 12% to $1.02 per share. With both downward revisions, the company now has a Zacks Rank #5 (Strong Sell).

Causes of Concern

American Capital was significantly impacted by the global financial crisis, which limited its access to the debt and equity capital markets. The market disruption and liquidity crisis also reduced the volume of mergers and acquisitions in the market, thereby affecting the company’s ability to continue generating additional liquidity.

Additionally, a persistent low interest rate environment adversely affected American Capital’s revenue growth. Moreover, American Capital has investments in privately-held, middle-market businesses that are more susceptible to general market declines, resulting from narrower product lines, smaller market shares, and highly-leveraged capital structures.

Stocks That Warrant a Look

While we prefer to avoid American Capital until we see signs of improvement in the company's performance, other stocks that are worth a look include Marlin Business Services Corp. (MRLN - Snapshot Report), Hercules Technology Growth Capital, Inc. (HTGC - Analyst Report) and MCG Capital Corporation (MCGC - Snapshot Report). All of these carry a Zacks Rank #2 (Buy).

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