American Capital's Value Vexes Investors

The recent private equity boom propelled assets of all kinds to record valuations. In that environment, investment firm American Capital Strategies(ACAS Quote) was a great stock to own.

Now things have changed.

The buyout boom is fizzling out. Asset values are depreciating because deals are being renegotiated and underwriting was too optimistic. Tougher credit markets are forcing deal volume to slow dramatically.

All these issues pose problems for American Capital, which through its investment business participates in buyouts of mostly privately held companies. The stock is now nicknamed "A-CRASH" by hedge fund short-sellers who believe the ticker "ACAS" is too polite for the upcoming carnage.

American Capital investors have seen impressive growth in recent years. The company's shares have outpaced the S&P 500 on a total-return basis for nine of the past 10 years.

But in the first half of this year, the stock fell 4%, compared with a 7% increase in the S&P. Management has been telling investors recently that the stock is wildly cheap, at around $41, or 1.1 times book value, with a 9% dividend yield.

But bears say the stock faces much more trouble. They believe the company's investment portfolio is set to be marked down in value in coming quarters, which will hurt book value and create losses.