Oaktree Specialty Lending has been treading water for the past six months, recording a small loss of 2.5% while holding steady at $12.36. The stock also fell short of the S&P 500’s 11.4% gain during that period.

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Why Do We Think Oaktree Specialty Lending Will Underperform?

We’re cautious about Oaktree Specialty Lending. Here are three reasons we avoid OCSL, plus one 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 13.2% over the last two years. Note: Quarters not shown were determined to be outliers because they were 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 13.5% 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

Tangible book value per share (TBVPS) is a crucial metric that measures the actual value of shareholders’ equity, stripping out goodwill and other intangible assets that may not be recoverable in a worst-case scenario.

Disappointingly for investors, Oaktree Specialty Lending’s TBVPS continued freefalling over the past two years as TBVPS declined at a -8.5% annual clip (from $18.72 to $15.69 per share).

Final Judgment

Oaktree Specialty Lending falls short of our quality standards. With its shares lagging the market recently, the stock trades at 8.9× forward P/E (or $12.36 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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