Dark outlook for SBIC and commercial finance actions

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Mb (0) – sm Mt (0.8em) – sm "type =" text "content =" The Zacks SBIC & Commercial Finance sector is composed of the following companies: Small and medium-sized developing companies, which are generally underserved by traditional banks and other lenders, are the primary targets of these lenders.

The products of these companies also include mezzanine loans, which generally pay high interest rates and can be converted into shares of the target company.

The three main themes of the sector are: "data-reactid =" 11 "> The Zacks SBIC & Commercial Finance sector is made up of companies that provide financing to small and medium-sized private companies in development, which are generally underserved by traditional banks Businesses in financial difficulty are the main targets of these lenders.

The products of these companies also include mezzanine loans, which generally pay high interest rates and can be converted into shares of the target company.

Here are the three major themes of the industry:

  • The continued growth of the national economy is expected to stimulate demand for small business loans. Higher interest rates help SBIC and commercial finance to generate better investment income, but this could reduce demand as borrowing becomes costly for clients. Thus, the net profit should not be significant.
  • Regulatory changes are expected to benefit SBIC stocks and commercial financing. In March 2018, an amendment to the Investment Company Act of 1940 introduced by the Small Business Credit Availability Act eased the debt limits of these companies, allowing them to carry their 1: 1 debt ratio of 2: 1. This helped these companies reduce portfolio risk by investing in higher capital structures without giving up on current yields. In other words, this has provided additional funding flexibility to these companies and will continue to offer more growth opportunities.
  • The SBIC and commercial finance companies are structured in such a way that they pay virtually nothing for corporate tax. Instead, these companies pay in the form of dividends nearly 90% of their investment income and annual capital gains to shareholders.
  • <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The Zacks industry ranking indicates disappointing prospects

    The SBIC Zacks & amp; The commercial finance industry is a group of 37 shares in the broader Zacks financing sector. The industry currently holds the number 168 Zacks ranking, which places it at the bottom of the 35% list of over 250 Zack industries.

    Zacks' sector ranking, which is essentially the average Zacks ranking of all the member stocks, indicates a short-term underperformance. Our research shows that the top 50% of industries ranked by Zacks perform better than the bottom 50% by a factor greater than 2 to 1.

    The positioning of the industry in the 50% of Zack's lowest ranked industries is the result of dismal earnings prospects for the constituent companies as a whole. In view of the revisions to the overall result estimates, it appears that analysts are gradually losing confidence in the earnings growth potential of this group.

    Despite this disappointing short-term picture, we will present some well-positioned stocks to outperform the market based on solid earnings prospects. Before, let's take a look at the recent performance of the stock market and its valuation.

    The industry underperforms the sector and the S & P 500

    The SBIC Zacks & amp; The commercial finance industry has underperformed both the S & P 500 composite and its own sector over the past two years.

    While the shares of this industry collectively lost 10.6% over this period, the Zacks S & P 500 composite gained 14.1% and the Zacks Finance sector 0.3%. "Data-reactid =" 16 ">The Zacks industry ranking indicates disappointing prospects

    Zacks SBIC & Commercial Finance is a group of 37 stocks belonging to the broader Zacks finance sector. The industry currently holds the number 168 Zacks ranking, which places it at the bottom of the 35% list of over 250 Zack industries.

    Zacks' sector ranking, which is essentially the average Zacks ranking of all the member stocks, indicates a short-term underperformance. Our research shows that the top 50% of industries ranked by Zacks perform better than the bottom 50% by a factor greater than 2 to 1.

    The positioning of the industry in the 50% of Zack's lowest ranked industries is the result of dismal earnings prospects for the constituent companies as a whole. In view of the revisions to the overall result estimates, it appears that analysts are gradually losing confidence in the earnings growth potential of this group.

    Despite this disappointing short-term picture, we will present some well-positioned stocks to outperform the market based on solid earnings prospects. Before, let's take a look at the recent performance of the stock market and its valuation.

    Sector underperformance and S & P 500

    Zacks SBIC & Commercial Finance has underperformed the S & P 500 composite and its own sector over the past two years.

    While the shares of this industry collectively lost 10.6% over this period, the Zacks S & P 500 composite grew by 14.1% and the Zacks finance sector by 0.3%.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Price performance over two years
    "data-reactid =" 17 ">Price performance over two years

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Industry Assessment

    One can get a good idea of ​​the relative valuation of the industry by looking at its tangible price-to-value ratio (P / TBV), which is commonly used to value lenders because of the large fluctuations in their quarterly earnings. to the other. .

    The sector currently has a 12 month P / TBV of 0.87X. This compares with the highest level of 1.13X, the lowest level of 0.78X and the median of 0.95X over the last five years. In addition, the sector trades at a significant discount to the market as a whole, with the 12-month P / TBV of the S & P 500 Composite being 9.75X, as shown in the chart below. "Data-reactid =" 35 ">Industry Assessment

    One can get a good idea of ​​the relative valuation of the industry by looking at its tangible price-to-value ratio (P / TBV), which is commonly used to value lenders because of the large fluctuations in their quarterly earnings. to the other. .

    The sector currently has a 12 month P / TBV of 0.87X. This compares with the highest level of 1.13X, the lowest level of 0.78X and the median of 0.95X over the last five years. In addition, the sector trades at a significant discount to the market as a whole, with the 12-month P / TBV of the S & P 500 Composite being 9.75X, as shown in the chart below.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tangible price book ratio (TTM)
    "data-reactid =" 36 ">Tangible price book ratio (TTM)

    The story continues

    As financial stocks generally have a low P / TBV ratio, the comparison of commercial loan providers and SBICs with the S & P 500 makes no sense to many investors. But a comparison of the group's P / TBV ratio with that of its broader sector ensures that the group trades at a decent discount. As shown in the chart below, the 12-month P / TBV in the Zacks Finance sector of 2.80X for the same period is well above the Zacks SBIC to Commercial Finance ratio.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tangible price book ratio (TTM)

    & nbsp; "data-reactid =" 59 ">Tangible price book ratio (TTM)

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bottom line

    While higher interest rates will continue to support SBIC & amp; investment income from commercial financing securities, it could reduce the demand for loans as borrowing costs increase. Nevertheless, regulatory changes and the growth of the economy will help the industry in the short term. So investing in this space could be rewarding.

    In particular, you should consider wagering on stocks with optimistic earnings prospects.

    We present an action with a Zacks Rank # 1 (strong buy) and two with a Zacks Rank # 2 (Buy) on which investors can consider betting.

    You can see the complete list of current stocks of Zacks # 1.

    Saratoga Investment Corp. (SAR): The title of the New York-based company has lost 3% over the past year. The Zacks consensus estimate for FY2020 has been revised slightly upwards over the past 60 days. The stock carries a Zacks Rank 1. "data-reactid =" 76 ">Bottom line

    Higher interest rates will continue to support investment income from SBIC and commercial finance companies, but they could lower the demand for such loans as borrowing costs increase. Nevertheless, regulatory changes and the growth of the economy will help the industry in the short term. So investing in this space could be rewarding.

    In particular, you should consider wagering on stocks with optimistic earnings prospects.

    We present an action with a Zacks Rank # 1 (strong buy) and two with a Zacks Rank # 2 (Buy) on which investors can consider betting.

    You can see the complete list of current stocks of Zacks # 1.

    Saratoga Investment Corp. (SAR): The title of the New York-based company has lost 3% over the past year. The Zacks consensus estimate for FY2020 has been revised slightly upwards over the past 60 days. The stock sports a Rank 1 Zacks.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Price and consensus: SAR
    "data-reactid =" 77 ">Price and consensus: SAR

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "GSV Capital Corp (CVMS): The stock of this company based in Woodside, California, has decreased 24.4% over the last year. The consensus for BPA 2019 has been revised upwards by 70% over the last 60 days. The stock currently carries the Zacks Rank # 2. "Data-reactid =" 94 ">GSV Capital Corp (CVMS): The stock of this company based in Woodside, California, has decreased 24.4% over the last year. The consensus for BPA 2019 has been revised upwards by 70% over the last 60 days. The stock currently has a Zacks Rank # 2.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Price and consensus: GSVC
    "data-reactid =" 95 ">Price and consensus: GSVC

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "TCP Capital Corp. (TCPC): The consensus EPS estimate for this Santa Monica, California-based company has risen slightly for 2019 over the past 60 days. This tier 2 Zacks action has lost 10.2% in the past year. "Data-reactid =" 112 ">TCP Capital Corp. (TCPC): The consensus EPS estimate for this Santa Monica, California-based company has risen slightly for 2019 over the past 60 days. This action Zacks Rank # 2 has lost 10.2% in the past year.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Price and consensus: TCPC
    "data-reactid =" 113 ">Price and consensus: TCPC

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    Do you want to know the latest Zacks Investment Research recommendations? Today, you can download 7 best actions for the next 30 days. Click to get this free report

    TCP Capital Corp. (TCPC): Free Stock Analysis Report

    Saratoga Investment Corp (SAR): Report of Analysis of Free Shares

    GSV Capital Corp (GSVC): Free Stock Analysis Report

    To read this article on Zacks.com, click here.

    Zacks Investment Research