Over the last six months, Oaktree Specialty Lending’s shares have sunk to $11.37, producing a disappointing 14.7% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Oaktree Specialty Lending, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Oaktree Specialty Lending Will Underperform?
Even with the cheaper entry price, we don't have much confidence in Oaktree Specialty Lending. Here are three reasons you should be careful with OCSL and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within financials, a stretched historical view may miss recent interest rate changes and market returns. Oaktree Specialty Lending’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 12.4% over the last two years. 
Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.
2. EPS Growth Has Stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Oaktree Specialty Lending’s flat EPS over the last five years was below its 15.2% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. Declining TBVPS Reflects Erosion of Asset Value
We consider tangible book value per share (TBVPS) an important metric for financial firms. TBVPS represents the real, liquid net worth per share of a company, excluding intangible assets that have debatable value upon liquidation.
To the detriment of investors, Oaktree Specialty Lending’s TBVPS continued freefalling over the past two years as TBVPS declined at a -7.7% annual clip (from $19.14 to $16.30 per share).
Final Judgment
We see the value of companies driving economic growth, but in the case of Oaktree Specialty Lending, we’re out. Following the recent decline, the stock trades at 7.6× forward P/E (or $11.37 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
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