Financial providers use their expertise in capital allocation and risk assessment to help facilitate economic growth while offering consumers and businesses essential financial services. But uncertainty about fiscal and monetary policy has tempered enthusiasm, and over the past six months, the industry has pulled back by 13.2%. This drop was especially disappointing since the S&P 500 held its ground.
Investors should tread carefully as many of these firms are also cyclical, and any misstep can have you catching a falling knife. With that said, here are three financials stocks we’re steering clear of.
Sixth Street Specialty Lending (TSLX)
Market Cap: $1.72 billion
Originally launched as TPG Specialty Lending before rebranding in 2020, Sixth Street Specialty Lending (NYSE: TSLX) is a business development company that provides customized financing solutions to middle-market companies across various industries.
Why Do We Steer Clear of TSLX?
- Annual revenue growth of 1.2% over the last two years was below our standards for the financials sector
- Flat earnings per share over the last two years lagged its peers
Sixth Street Specialty Lending is trading at $18.28 per share, or 9.2x forward P/E. Read our free research report to see why you should think twice about including TSLX in your portfolio.
Oaktree Specialty Lending (OCSL)
Market Cap: $991 million
Managed by Oaktree Capital Management, one of the world's premier alternative investment firms, Oaktree Specialty Lending (NASDAQ: OCSL) is a business development company that provides customized financing solutions to mid-market companies across various industries.
Why Should You Sell OCSL?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 12.4% annually over the last two years
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 18.1% annually, worse than its revenue
- Tangible book value per share tumbled by 4.5% annually over the last five years, showing financials sector trends are working against its favor during this cycle
Oaktree Specialty Lending’s stock price of $11.25 implies a valuation ratio of 7.7x forward P/E. Dive into our free research report to see why there are better opportunities than OCSL.
Capital Southwest (CSWC)
Market Cap: $1.33 billion
Originally founded in 1961 as a venture capital investor that helped launch Texas Instruments, Capital Southwest (NASDAQ: CSWC) is a business development company that provides debt and equity financing to middle-market companies primarily in the United States.
Why Are We Hesitant About CSWC?
- Earnings per share fell by 6.7% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
At $22.17 per share, Capital Southwest trades at 9.6x forward P/E. Check out our free in-depth research report to learn more about why CSWC doesn’t pass our bar.
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