TPG Specialty Lending (NYSE: TSLX) and Hercules Capital (NYSE:HTGC) are both small-cap finance companies, but which is the superior stock? We will contrast the two businesses based on the strength of their analyst recommendations, valuation, dividends, risk, profitability, earnings and institutional ownership.

Risk and Volatility

TPG Specialty Lending has a beta of 0.71, indicating that its stock price is 29% less volatile than the S&P 500. Comparatively, Hercules Capital has a beta of 0.83, indicating that its stock price is 17% less volatile than the S&P 500.

Profitability

This table compares TPG Specialty Lending and Hercules Capital’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
TPG Specialty Lending 60.77% 12.68% 7.41%
Hercules Capital 38.69% 12.93% 6.76%

Analyst Recommendations

This is a breakdown of recent ratings and target prices for TPG Specialty Lending and Hercules Capital, as provided by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
TPG Specialty Lending 0 2 2 0 2.50
Hercules Capital 1 1 4 0 2.50

TPG Specialty Lending presently has a consensus target price of $20.25, suggesting a potential downside of 1.27%. Hercules Capital has a consensus target price of $15.08, suggesting a potential upside of 24.35%. Given Hercules Capital’s higher probable upside, analysts clearly believe Hercules Capital is more favorable than TPG Specialty Lending.

Valuation and Earnings

This table compares TPG Specialty Lending and Hercules Capital’s top-line revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
TPG Specialty Lending N/A N/A N/A $2.17 9.45
Hercules Capital $187.39 million 5.36 $140.30 million $0.92 13.18

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

Institutional and Insider Ownership

62.7% of TPG Specialty Lending shares are owned by institutional investors. Comparatively, 44.6% of Hercules Capital shares are owned by institutional investors. 4.9% of TPG Specialty Lending shares are owned by insiders. Comparatively, 3.9% of Hercules Capital shares are owned by insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a stock will outperform the market over the long term.

Dividends

TPG Specialty Lending pays an annual dividend of $1.56 per share and has a dividend yield of 7.6%. Hercules Capital pays an annual dividend of $1.24 per share and has a dividend yield of 10.2%. TPG Specialty Lending pays out 71.9% of its earnings in the form of a dividend. Hercules Capital pays out 134.8% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future.

Summary

TPG Specialty Lending beats Hercules Capital on 7 of the 13 factors compared between the two stocks.

TPG Specialty Lending Company Profile

TPG Specialty Lending, Inc. is an externally managed, closed-end, non-diversified management investment company. The Company is a specialty finance company focused on lending to middle-market companies. It seeks to generate current income primarily in the United States-domiciled middle-market companies through direct originations of senior secured loans and originations of mezzanine and unsecured loans and investments in corporate bonds and equity securities. The Company invests in first-lien debt, second-lien debt, mezzanine and unsecured debt and equity and other investments. Its first-lien debt may include standalone first-lien loans; last out first-lien loans; unitranche loans and secured corporate bonds. Its second-lien debt may include secured loans and secured corporate bonds, with a secondary priority behind first-lien debt. As of December 31, 2016, the Company’s portfolio was invested across 19 different industries. The Company’s investment advisor is TSL Advisers, LLC.

Hercules Capital Company Profile

Hercules Capital, Inc. is a specialty finance company. The Company is an internally managed, non-diversified, closed-end investment company. The Company focuses on providing senior secured venture growth loans to venture capital-backed companies in a range of technology, life sciences, and sustainable and renewable technology industries. The Company’s investment objective is to maximize its portfolio total return by generating current income from its debt investments and capital appreciation from its warrant and equity-related investments. The Company’s primary business objectives are to increase its net income, net operating income and net asset value (NAV) by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related industries with attractive current yields and the potential for equity appreciation and realized gains. The Company focuses its investments in companies active in the technology industry sub-sectors.

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