Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Oaktree Specialty Lending Corp. (OCSL - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Oaktree Specialty Lending has a trailing twelve months PE ratio of 10.71, as you can see in the chart below:
This level actually compares favorably with the market at large, as the PE for the S&P 500 stands at about 19.27. If we focus on the long-term PE trend, Oaktree Specialty Lending’s current PE level puts it above its midpoint of 8.4 over the past five years, with the number having risen rapidly over the past few months. However, the current level stands below the highs for the stock, suggesting that it can be a solid entry point.
Moreover, the stock’s PE also compares favorably with the Zacks Finance Market sector’s trailing twelve months PE ratio, which stands at 14.25. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Oaktree Specialty Lending has a forward PE ratio (price relative to this year’s earnings) of 10.36, so it is fair to say that a slightly more value-oriented path may be ahead for Oaktree Specialty Lending’s stock in the near term too.
An often, overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, Oaktree Specialty Lending’s P/CF ratio of 9.7 is lower than the Zacks Finance industry average of 5.57, which indicates that the stock is somewhat overvalued in this respect.
Broad Value Outlook
In aggregate, Oaktree Specialty Lending currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Oaktree Specialty Lending a solid choice for value investors.
What About the Stock Overall?
Though Oaktree Specialty Lending might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of F and Momentum Score of D. This gives OCSL a Zacks VGM score — or its overarching fundamental grade — of D. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been disappointing. The current year consensus estimate declined 2% in the past two months, whereas the full year 2020 estimate declined 5.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Oaktree Specialty Lending Corp. Price and Consensus
Owing to such bearish estimate trends, the stock has a Zacks Rank #3 (Hold), which is why we are looking for in-line performance from the company in the near term.
Oaktree Specialty Lending is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (bottom 41% out of more than 250 industries) and a
Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the broader industry has underperformed the market at large, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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