CM Finance (NASDAQ: CMFN) and Saratoga Investment Corp (NYSE:SAR) are both small-cap finance companies, but which is the better investment? We will compare the two businesses based on the strength of their earnings, analyst recommendations, dividends, valuation, institutional ownership, profitability and risk.

Analyst Recommendations

This is a summary of current ratings and recommmendations for CM Finance and Saratoga Investment Corp, as provided by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
CM Finance 0 1 0 0 2.00
Saratoga Investment Corp 0 1 0 0 2.00

Saratoga Investment Corp has a consensus price target of $23.00, suggesting a potential upside of 8.18%. Given Saratoga Investment Corp’s higher possible upside, analysts plainly believe Saratoga Investment Corp is more favorable than CM Finance.

Risk and Volatility

CM Finance has a beta of 1.42, suggesting that its share price is 42% more volatile than the S&P 500. Comparatively, Saratoga Investment Corp has a beta of 0.5, suggesting that its share price is 50% less volatile than the S&P 500.

Profitability

This table compares CM Finance and Saratoga Investment Corp’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
CM Finance 72.19% 10.11% 5.41%
Saratoga Investment Corp 26.84% 8.03% 3.19%

Earnings & Valuation

This table compares CM Finance and Saratoga Investment Corp’s revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
CM Finance N/A N/A N/A $1.66 6.02
Saratoga Investment Corp $33.96 million 3.74 $9.43 million $1.58 13.46

Saratoga Investment Corp has higher revenue and earnings than CM Finance. CM Finance is trading at a lower price-to-earnings ratio than Saratoga Investment Corp, indicating that it is currently the more affordable of the two stocks.

Dividends

CM Finance pays an annual dividend of $1.00 per share and has a dividend yield of 10.0%. Saratoga Investment Corp pays an annual dividend of $1.88 per share and has a dividend yield of 8.8%. CM Finance pays out 60.2% of its earnings in the form of a dividend. Saratoga Investment Corp pays out 119.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. CM Finance is clearly the better dividend stock, given its higher yield and lower payout ratio.

Institutional and Insider Ownership

44.1% of CM Finance shares are held by institutional investors. Comparatively, 17.0% of Saratoga Investment Corp shares are held by institutional investors. 1.8% of CM Finance shares are held by insiders. Comparatively, 32.0% of Saratoga Investment Corp shares are held by insiders. Strong institutional ownership is an indication that hedge funds, large money managers and endowments believe a company is poised for long-term growth.

Summary

CM Finance beats Saratoga Investment Corp on 8 of the 12 factors compared between the two stocks.

About CM Finance

CM Finance Inc is an externally managed, non-diversified closed-end management investment company. The Company is a specialty finance company that invests primarily in the debt of the United States middle-market companies. The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing in debt and related equity of privately held lower middle-market companies. As of June 30, 2016, the Company’s portfolio consisted of debt and equity investments in 22 portfolio companies. It invests in unitranche loans and standalone second and first lien loans, with an emphasis on floating rate debt. It also selectively invests in mezzanine loans/structured equity and in the equity of portfolio companies through warrants and other instruments.CM Investment Partners LLC is an external investment advisor of the Company.

About Saratoga Investment Corp

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. Its investment objective is to generate current income and, to a lesser extent, capital appreciation from its investments. It purchases mezzanine debt and makes equity investments in middle market companies. It may invest in other investments, such as investments in distressed debt, including securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles, such as collateralized loan obligation funds. Its leveraged loan portfolio consists primarily of first lien and second lien term loans. The Company’s investment activities are externally managed and advised by Saratoga Investment Advisors, LLC.

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