Oxford Lane Capital Stock: Don’t Buy Until You See Massive Panic

Torsten Asmus

Thesis

We believe investors in Oxford Lane Capital (NASDAQ: OXLC) must develop a hunch with price action, as its long-term total returns belie the strength of its distribution yield, given the secular downward trend in its net asset value (NAV).

As a result, its seemingly high distribution yield ignores the capital depreciation reflected in OXLC’s long-term downtrend. Accordingly, investors are encouraged to assess OXLC’s performance through the total return framework (which encompasses its distribution return).

Therefore, the right way to navigate with a higher probability of success in stocks/funds with long-term downtrends is to go to the short side. Countertrend opportunities exist but should be limited to capitulation-like moves, as seen on its long-term chart.

We have yet to find an attractive opportunity for investors to go long or short on OXLC at current levels. Therefore, we urge investors to be patient and wait for the right opportunity to present itself.

Wait for the right opportunity to go long/short

We believe that OXLC investors are well aware of the risks inherent in closed-end funds that invest in securitization vehicles comprised of debt securities that are unrated or rated below investment grade.

Chart
Data by YCharts

OXLC’s ANR is also in a secular downtrend, posting a decline of nearly 65% ​​over the past ten years, as seen above.

OXLC Pricing Chart (Monthly)

OXLC Pricing Chart (Monthly) (TradingView)

But just knowing that OXLC has a declining NAV doesn’t help investors pick the right opportunities for higher probability setups with the fund. Therefore, we believe that investors should take a close look at the price action in OXLC to help them analyze suitable long/short opportunities.

Given the decline in OXLC’s net asset value over time, investors should not be surprised that OXLC has a long-term downward trend, as shown above. Trend-following investors know that the right way to win in the long term for secular downtrend stocks is to follow the trend!

Price action analysis helps investors discern appropriate resistance zone and bearish reversal setups to pick higher probability entry levels to sell OXLC and overcome the downtrend bias. Remember, the trend is your friend until it’s not. So far, we’ve yet to see anything under the hood that suggests otherwise.

As seen above, the 50-month moving average has been a reliable dynamic resistance level, preventing further bullish buying from reversing its long-term bearish bias. Therefore, investors considering short setups may consider using the 50-month moving average as a resistance area to execute their trades, building on appropriate bearish reversal price action.

OXLC’s most recent retest of its 50-month moving average was in November 2021. Currently, we have not observed any suitable short setup with an attractive reward-risk profile for investors.

On the other hand, investors who choose to go long must be very patient. As seen above, there were three excellent opportunities for long-only investors to capitalize on major sellouts over the past decade. To participate in long-only countertrend opportunities for OXLC, we urge investors to be very selective and only consider “capitulation-type” setups to improve their reward-risk profile.

These capitulation movements were often preceded by rapid, vertical-type selling, followed by a bullish price reversal. To further assist investors in corroborating price action momentum, we encourage investors to add the BofA High Yield Spread Chart to their toolkit.

Spreads BofA High Yield % (monthly)

Spreads BofA High Yield % (monthly) (TradingView)

As seen above, the significant dips seen in the OXLC price chart correspond to significant spike signals in BofA’s high yield spreads over the past ten years.

Currently, with a gap of only 5.3%, it is even below the 50% mean reversion mark between its long-term support and its intermediate resistance. Additionally, OXLC’s price action has shown no capitulation movement in its long-term chart, indicating significant market panic over high-yield debt.

Is OXLC stock a buy, sell or hold?

We have yet to glean a solid long/short opportunity in OXLC from its price action. Therefore, we urge investors to bide their time and wait on the sidelines.

Despite a payout yield of over 17%, OXLC posted a year-to-date total return of -26.15%. Therefore, we believe investors should consider OXLC’s price action and performance within a total return framework when considering adding exposure.

As such, we are rating OXLC as a hold at this time.

Sallie R. Loera