Valuations Haunt American Capital

The control premium was the subject of much discussion at the investor day. At one point, an American Capital official said the Securities and Exchange Commission was behind the curve on FAS 157. Nonetheless, the company also said that the control premium issue was posed to the SEC, which blessed the use of it -- by essentially not objecting to it.

"If they objected to it, they wouldn't have approved it for the first quarter," an official said. At this point, American Capital and its accountants are still working through the FAS 157 language. A few months from now, it wouldn't be surprising if the control premium disappears and American Capital is forced to value this investment like the disappointment it is.

Even if American Capital can get away with all these aggressive valuations, the company is starting to fool fewer and fewer investors.

Just 45% of American Capital's stock is owned by institutions -- which means it has a very heavy retail investor base, which is not a positive. Less than 1% of the stock is held by insiders.

Retail investors continue to chase a very high-dividend yield, now at 12.5%, while their principal investment -- the price of the stock -- has fallen 35% from its 52-week high.

I'd stay clear of this dog. These days, the smart money in this stock is in the short trade.