Gladstone Capital (NASDAQ: GLAD) and Saratoga Investment (NYSE:SAR) are both small-cap finance companies, but which is the superior investment? We will contrast the two businesses based on the strength of their earnings, institutional ownership, profitability, valuation, dividends, analyst recommendations and risk.

Insider & Institutional Ownership

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13.6% of Gladstone Capital shares are owned by institutional investors. Comparatively, 17.4% of Saratoga Investment shares are owned by institutional investors. 5.9% of Gladstone Capital shares are owned by insiders. Comparatively, 32.0% of Saratoga Investment shares are owned by insiders. Strong institutional ownership is an indication that large money managers, hedge funds and endowments believe a stock will outperform the market over the long term.

Analyst Ratings

This is a breakdown of current recommendations for Gladstone Capital and Saratoga Investment, as provided by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Gladstone Capital 0 3 2 0 2.40
Saratoga Investment 0 2 3 0 2.60

Gladstone Capital presently has a consensus target price of $9.16, suggesting a potential upside of 4.48%. Saratoga Investment has a consensus target price of $24.00, suggesting a potential upside of 12.62%. Given Saratoga Investment’s stronger consensus rating and higher probable upside, analysts clearly believe Saratoga Investment is more favorable than Gladstone Capital.

Profitability

This table compares Gladstone Capital and Saratoga Investment’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Gladstone Capital 58.48% 9.97% 5.95%
Saratoga Investment 36.37% 8.76% 3.33%

Valuation and Earnings

This table compares Gladstone Capital and Saratoga Investment’s revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
Gladstone Capital $39.23 million 5.95 $17.18 million $0.90 9.74
Saratoga Investment $33.16 million 4.02 $11.38 million $2.25 9.47

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

Risk and Volatility

Gladstone Capital has a beta of 1.11, indicating that its stock price is 11% more volatile than the S&P 500. Comparatively, Saratoga Investment has a beta of 0.14, indicating that its stock price is 86% less volatile than the S&P 500.

Dividends

Gladstone Capital pays an annual dividend of $0.84 per share and has a dividend yield of 9.6%. Saratoga Investment pays an annual dividend of $2.00 per share and has a dividend yield of 9.4%. Gladstone Capital pays out 93.3% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Saratoga Investment pays out 88.9% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Saratoga Investment has increased its dividend for 2 consecutive years.

Summary

Gladstone Capital beats Saratoga Investment on 9 of the 17 factors compared between the two stocks.

Gladstone Capital Company Profile

Gladstone Capital Corporation is a closed-end, non-diversified management investment company, operating as a business development company (BDC). The objectives of the Company are to achieve and grow current income by investing in debt securities of established businesses that it believes will provide stable earnings and cash flow to pay expenses, make principal and interest payments on its outstanding indebtedness and make distributions to stockholders that grow over time, and to provide its stockholders with long-term capital appreciation in the value of its assets by investing in equity securities of established businesses that it believes can grow over time to permit it to sell its equity investments for capital gains. The Company is focused on investing in lower middle-market companies in the United States. It has investments in south, Midwest, west and northeast of the United States. Its portfolio allocation includes debt investments and equity investments.

Saratoga Investment Company Profile

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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