Earnings

Choosing Between Hot Stocks: SLM Corporation (SLM), Prospect Capital Corporation (PSEC)

The shares of SLM Corporation have decreased by more than -12.30% this year alone. The shares recently went down by -4.89% or -$0.51 and now trades at $9.91. The shares of Prospect Capital Corporation (NASDAQ:PSEC), has jumped by 1.19% year to date as of 12/04/2018. The shares currently trade at $6.82 and have been able to report a change of -0.44% over the past one week.

The stock of SLM Corporation and Prospect Capital Corporation were two of the most active stocks on Tuesday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: 25.17% versus 5.00%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that SLM will grow it’s earning at a 25.17% annual rate in the next 5 years. This is in contrast to PSEC which will have a positive growth at a 5.00% annual rate. This means that the higher growth rate of SLM implies a greater potential for capital appreciation over the years.

Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. SLM has an EBITDA margin of 93.02%, this implies that the underlying business of SLM is more profitable. These figures suggest that SLM ventures generate a higher ROI than that of PSEC.

Cash Flow



The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, SLM’s free cash flow per share is a negative -0.91, while that of PSEC is also a negative -0.02.

Valuation

SLM currently trades at a forward P/E of 8.23, a P/B of 1.77, and a P/S of 2.40 while PSEC trades at a forward P/E of 7.66, a P/B of 0.73, and a P/S of 3.79. This means that looking at the earnings, book values and sales basis, SLM is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions

The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of SLM is currently at a -32.9% to its one-year price target of 14.77. Looking at its rival pricing, PSEC is at a -2.57% relative to its price target of 7.00.




When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), SLM is given a 1.50 while 3.50 placed for PSEC. This means that analysts are more bullish on the outlook for PSEC stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for SLM is 10.33 while that of PSEC is just 10.89. This means that analysts are more bullish on the forecast for SLM stock.

Conclusion

The stock of Prospect Capital Corporation defeats that of SLM Corporation when the two are compared, with PSEC taking 5 out of the total factors that were been considered. PSEC happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, PSEC is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for PSEC is better on when it is viewed on short interest.

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