American Capital Strategies searches for targets that are ripe for change

For the most part, I usually argue here against buying shares of investment companies, but there are exceptions, and American Capital Strategies is one.

American Capital Strategies (NASDAQ: ACAS) invests in middle-market companies through 12 offices in the United States and Europe. Typically, it invests up to $800 million to fund management and employee buyouts, private equity firm buyouts, acquisitions, and restructurings.

Analysts like ACAS's projected asset growth rate for 2008, including alternative assets managed through external funds.

Further, portfolio income should increase via the improved pricing of recent investments; fee income should also perform well, due to fund management business expansion. Analysts also like ACAS's very good track record of returning capital to shareholders. The Reuters F2008/F2009 EPS consensus estimates for ACAS are $3.31/$3.46.

The risks? Analysts are keeping an eye on possible, further write-downs associated with externally managed funds.

The First Call mean rating for ACAS is: Hold [19 firms]. Mean 2008 target: $37 [high: $50, low: $34].

Stock Analysis: American Capital Strategies is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from ACAS's shares. Sell/Stop Loss if you were to purchase shares in this company: $22.

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.