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$PHK is a closed-end fund that had historically habitually traded at a large NAV premium, with the irrational bull thesis predicated on an unsustainable dividend. We had correctly predicted a dividend cut would be forthcoming. Now that dividend has been cut, the next stop for $PHK is NAV using $PHT as an analog. Target price of $7.11, represents -18% downside from current $8.62 price. This thesis is very simple. For the reasons articulated in our previous PIMCO High Income Fund (NYSE: PHK ) article , the bull thesis for $PHK trading at a significant premium to NAV was highly misguided as the dividend level was unsustainable. On 9/1/15, Pimco announced the predicted dividend cut in the September dividend announcement , cutting the monthly dividend by 15% to $0.103 from $0.122. $PHK’s stock price has decreased significantly today given the announcement, -8.8% currently to $8.62 from yesterday’s close of $9.45. Investors in $PHK or potential short-sellers may believe that the selling pressure will subside given the observed price action. However, this is misguided, as we have an analog for another high yield closed-end fund that had historically traded at a premium and had its dividend cut. Pioneer High Income Trust (NYSE: PHT ), which launched in Apr-2002 and cut its dividend in Feb-15 to $0.115/month from $0.1375/month (-16% dividend cut). This caused the fund to trade down dramatically from a ~45% premium to a current -1.5% discount to NAV, causing significant capital loss for CEF investors. (click to enlarge) $PHK’s current NAV is $7.11 (see ” Daily Statistics “), meaning that the current $8.62 price still represents a 21% premium to NAV. Now that the “dividend consistency” bull argument for $PHK has been discredited, there is no “NAV premium” floor for the fund and we expect $PHK to follow a very similar trajectory to $PHT, with $PHK ultimately trading to NAV in the near future. Note: In addition, there is adequate borrow for short-sellers. Caveat emptor. Disclosure: I am/we are short PHK. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The author and/or others he advises holds short a position in PHK at the time of publishing this article. The author may make trades in securities mentioned without notification. The information contained in this article is impersonal and not tailored to the investment needs of any specific person. You should consult with a professional where appropriate. The author shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. The opinions expressed in this article are for informational purposes only and should not be construed as investment advice. The article is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy or investment product. The research for this article is based on public information that the author considers reliable, but the author does not represent that the research or the article is accurate or complete, and it should not be relied on as such. The views and opinions expressed herein are current as of the date of this article and are subject to change. Any projections, forecasts and estimates contained in this article are necessarily speculative in nature and are based upon certain assumptions. In addition, matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond the author’s control. No representations or warranties are made as to the accuracy of such forward-looking assumptions. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary significantly from actual result. Scalper1 News
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