Saratoga buys mezzanine debt. This company's goal is to create the best cash flow from the debt that they hold. Although mezzanine debt was at the root of the financial crisis, the vetting of debt is far more intricate, lowering the risk SAR takes on. But, the best part is that this company is trading at a mere fraction of its EPS when compared to other companies in the sector. It is a huge bargain.
Saratoga Investment Corp. is a specialty finance company. The Company is an externally managed, closed-end, non-diversified management investment company. The Company invests primarily in leveraged loans and mezzanine debt issued by private middle-market companies in the United States. The company is traded in the United States under SAR. Its market capitalization is $122 million and its stock is traded at $21.75. The objective of this fund is to earn income through the debt payments. To a lesser extent, they company does try and earn capital appreciation, however, that is a smaller portion of the company’s focus.
Mezzanine debt is a type of layering of debt where the company will purchase multiple debts that may have a great deal of variability in the risk. This diversifies the debt and diversifies the risk that SAR takes on. The theory is that if there is any kind of default it will be on a smaller portion of the debt held by the company. Otherwise, the company purchases these layers of debt in one large, bulk purchase and then earns the interest from then on out.
It should be noted that this type of instrument was at the heart of the financial crisis of 2008. However, it must also be noted that the economic landscape was entirely different than before and credit risks have been heavily scrutinized. This was not the case back in the housing bubble that created the financial crisis.
Investing in a stock like this would be more akin to investing in a bond. As mentioned, the primary purpose of the investments SAR purchases is for cash flow versus capital appreciation. Given that, with the stock trading at $21.75 per share the cashflow you are receiving for that investment has a very large ratio. Currently, the earnings-per-share is nearly 10-times, about 2.5 times better than the stock market’s current average of 25-times. Here are the EPS for the past few years:
This is an excellent opportunity to invest in a great cashflow stream. What is also interesting is that the Price/Book value. Whereas the market recognizes the industry and has invested in the sector, this stock has been missed. Price/Book in industry is 15.17. However, SAR is trading at 0.96, well below the industry average. There is potential for this stock to catch up to the industry. If it does SAR’s stock could see a move as much as 100 percent, pushing the stock up to about $45.00 per share.
The fact that the general market recognizes the industry and has pushed the stocks of the sector upward as it has is telling of the potential for this company. But, I have not found anything in the stock itself that tells me why the company has been left behind as it has. The earnings are generally increasing, a function of good management. In fact, the funds invested do not really change. These assets are largely the same and will not affect anything with regards to the cashflow. That has more to do with management being effective at employing the capital available.
The economy is continuing to expand. This will lead to better opportunities for the individuals who are paying these mezzanine debts. Simply, as the economy expands and incomes increase, the risk levels decrease for debt holders that are paying these instruments. At the same time, management has demonstrated that they are efficient at employing the capital they have on hand.
If you are looking for a company to purchase that is discounted to the industry and the general market, and are looking for a great source of cashflow, SAR is an excellent opportunity.
|This article from Macroaxis published on 08 of February contributed to the next trading period closing price depreciation.The trading price change to the next next day price was 0.41% . The trading price change when the story was published to current price is 11.13% .|