Capital Southwest

CSWC

Market cap $1.13B

The Undercovered Dozen series spotlights 12 lesser-known stocks highlighted in recent Seeking Alpha articles. This week's edition covers articles published between October 10 and October 16, offering fresh investment ideas. The series aims to inspire discussion and help investors discover overlooked opportunities in the market.

Investors need to pay close attention to CSWC stock based on the movements in the options market lately.

DALLAS, Oct. 15, 2025 (GLOBE NEWSWIRE) -- Capital Southwest Corporation (“Capital Southwest”) (Nasdaq: CSWC), an internally managed business development company focused on providing flexible financing solutions to support the acquisition and growth of middle market businesses, is pleased to announce its preliminary operating results for the second quarter of its 2026 fiscal year (quarter ended September 30, 2025) and its second quarter 2026 earnings release and conference call schedule.

Capital Southwest has dipped along with other BDCs as the stock market overreacts to a perceived increase in credit risk from the failure of two auto companies. The internally managed BDC is covering its base cash dividend by 112% and had an undistributed earnings spillover of at least $1 as of the end of its recent quarter. CSWC should be able to maintain its dividend, with the Fed set to cut rates by another 50 basis points to end the year.

I discuss several dividend stocks yielding 10%+ that I believe remain undervalued. Strong balance sheets and reliable cash flows make these payouts sustainable. This provides a rare chance to lock in high income before the market reprices them.

Building a resilient retirement portfolio requires a mix of disruption-proof income from REITs, midstream energy, and high-yielding assets, plus growth stocks and ETFs. Current market challenges—AI disruption, weak job market, inflation risks—make long-term planning difficult, but also highlight the need for self-reliance and diversification. Core portfolio holdings should include large, proven REITs, natural gas midstream companies, select high-yield stocks, BDCs, preferred equity ETFs, and actively managed income funds.

Rose's Income Garden (RIG) portfolio features 81 investments, with 11 monthly payers across BDCs, ETFs, and CEFs focused on income generation. CSWC and PFLT are highlighted BDCs, offering high yields; CSWC is a strong buy on dips, while PFLT is a speculative buy, despite recent pressure. RIG includes three crypto-related ETFs (BITO, ETHU, SSK), providing exposure to digital assets with variable payouts, and two bond-focused ETFs (JBBB, SHYG) as cash alternatives.

Blackstone Secured Lending and Morgan Stanley Direct Lending are high-quality BDCs facing potential dividend cuts due to falling coverage ratios. BXSL's fundamentals remain strong, but tight dividend coverage, high floating-rate exposure, and significant upcoming debt maturities raise concerns about a near-term cut. MSDL, despite robust liquidity and investment-grade ratings, has seen declining earnings, rising non-performing loans, and high floating-rate exposure, signaling possible dividend reduction.

AI disruption is happening faster than most expect, with trillions in CapEx reshaping industries and creating huge risks for income investors. BDCs thrive on high yields, but their heavy software exposure now faces AI-driven disruption that could upend portfolios and cash flows. I'm staying cautious, focusing on proven BDCs with strong diversification and lower disruption risk to balance income with resilience.

Capital Southwest offers a high 11.1% dividend yield and a new monthly payout, appealing to income-focused investors despite a challenging BDC environment. CSWC's portfolio is defensively structured with nearly 90% in senior secured first lien debt, diversified across industries, and benefits from floating-rate exposure. While CSWC's NAV has remained stable, meaningful growth is unlikely until interest rates decline; shares currently trade at a 38% premium to NAV.