TPG Specialty Lending, Inc. (NYSE:TSLX) and PennyMac Financial Services, Inc. (NYSE:PFSI) are the two most active stocks in the Mortgage Investment industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect TSLX to grow earnings at a 3.00% annual rate over the next 5 years. Comparatively, PFSI is expected to grow at a 2.61% annual rate. All else equal, TSLX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. TSLX’s ROI is 6.60% while PFSI has a ROI of 11.50%. The interpretation is that PFSI’s business generates a higher return on investment than TSLX’s.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. TSLX’s debt-to-equity ratio is 0.59 versus a D/E of 9.66 for PFSI. PFSI is therefore the more solvent of the two companies, and has lower financial risk.
TSLX trades at a forward P/E of 12.20, a P/B of 1.34, and a P/S of 6.07, compared to a forward P/E of 5.92, a P/B of 1.04, and a P/S of 0.96 for PFSI. TSLX is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. TSLX is currently priced at a 3.2% to its one-year price target of $20.94. Comparatively, PFSI is -14% relative to its price target of $20.00. This suggests that PFSI is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for TSLX and 2.80 for PFSI, which implies that analysts are more bullish on the outlook for PFSI.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. TSLX has a beta of 0.76 and PFSI’s beta is 0.60. PFSI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. TSLX has a short ratio of 2.45 compared to a short interest of 4.16 for PFSI. This implies that the market is currently less bearish on the outlook for TSLX.
PennyMac Financial Services, Inc. (NYSE:PFSI) beats TPG Specialty Lending, Inc. (NYSE:TSLX) on a total of 6 of the 11 factors compared between the two stocks. PFSI is growing fastly. In terms of valuation, PFSI is the cheaper of the two stocks on an earnings, book value and sales basis, PFSI is more undervalued relative to its price target. Finally, AI has better sentiment signals based on short interest.