Chicago, IL – May 9, 2025 – Today, Zacks Equity Research discusses Bain Capital Specialty Finance, Inc. BCSF, PennantPark Investment Corp. PNNT and Stellus Capital Investment Corp. SCM.
Link: https://www.zacks.com/commentary/2465216/3-sbic-commercial-finance-stocks-to-buy-despite-industry-challenges
As the uncertainty over President Trump's tariffs continues, the Zacks SBIC & Commercial Finance industry faces challenges from relatively high interest rates and sluggish economic growth, dampening product demand and refinancing activities. Asset quality may weaken as borrowers struggle to service debt amid prolonged higher rates and geopolitical risks.
However, regulatory changes since 2018 have eased leverage limits, allowing more flexible funding and growth opportunities, helping industry players. Therefore, some of the companies like Bain Capital Specialty Finance, Inc., PennantPark Investment Corp. and Stellus Capital Investment Corp. are worth betting on.
The Zacks SBIC & Commercial Finance industry comprises companies that provide finance to small and mid-sized privately held developing firms. These firms are typically underserved by traditional banks and other lenders. Additionally, firms suffering from financial distress are the primary target clients of these lenders. The industry players provide customized financing solutions, ranging from senior debt instruments to equity capital.
This financing is provided for a change of ownership transactions, buyouts, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors, among others. Some of the other products offered by the industry participants are mezzanine loans that typically pay high interest rates and can be converted into equity in the target firm.
Relatively High Rates & Subdued Economic Growth: The Federal Reserve has kept the interest rates unchanged at 4.25-4.5% after lowering them by 100 basis points last year. The Fed chair, Jerome Powell, noted that there is no "need to be in a hurry" to make any monetary policy change until there is some clarity on the impact of Trump's tariffs on employment and inflation. As such, interest rates are likely to stay higher for a longer time. This, along with subdued economic growth expectations, will lower the demand for products and services offered by SBIC & Commercial Finance industry players.
As the transaction activities remain weak, the industry players' total investment income growth will likely be subdued. Further, relatively higher rates are expected to result in a slowdown in the refinancing activities, adversely impacting the industry players' financials.
Asset Quality: Following the COVID-19 outbreak and a subsequent halt in business activities in 2020, most sectors wherein SBIC & Commercial Finance companies provide finance were hit hard. This raised fears of a deterioration of asset quality for industry players. Nonetheless, support from the administration in the form of stimulus packages and the subsequent reopening of businesses supported economic growth. This, thus, prevented a substantial rise in delinquency rates for the industry players.
However, with prolonged higher interest rates, industry players are likely to witness some weakness in asset quality as the portfolio companies might find it difficult to service debt. Also, heightened geopolitical risk and uncertainty over tariff-related headwinds will put a strain on SBIC & Commercial Finance companies' asset quality.
Regulatory Changes: In 2018, an amendment to the Investment Company Act of 1940 by the Small Business Credit Availability Act eased leverage limits for such companies, allowing them to increase their debt-to-equity leverage to 2:1 from 1:1. This helped these companies reduce portfolio risks by investing in higher capital structures without forgoing current returns. Thus, the act provided extra funding flexibility to these companies and will continue offering more growth opportunities.
The Zacks SBIC & Commercial Finance industry is a 38-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #180, which places it in the bottom 27% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of discouraging earnings outlook for the constituent companies in aggregate. Looking at aggregate earnings estimate revisions, it seems that analysts are gradually losing confidence in this group's bottom-line growth potential. Over the past year, the industry's earnings estimates for 2025 have been revised 7.1% lower.
Before we present a few stocks that are well-positioned to outperform the market, let's check out the industry's recent stock market performance and valuation picture.
The Zacks SBIC & Commercial Finance industry has underperformed the S&P 500 composite and its sector over the past year.
The stocks in this industry have collectively lost 7.5% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 7.8% and 14.7%, respectively.
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TB), which is commonly used for valuing loan providers because of large variations in their earnings from one quarter to the next.
The industry currently has a trailing 12-month P/TB of 0.88X. The highest level of 1.07X, the lowest of 0.73X and a median of 0.93X have been recorded by the industry over the past five years. Also, the industry is trading at a significant discount compared with the market at large, as evidenced by the trailing 12-month P/TB for the S&P 500 composite of 12.39X.
As finance stocks typically have a low P/TB ratio, comparing SBIC & commercial loan providers with the S&P 500 may not make sense to many investors. Hence, comparing the group's P/TB ratio with its broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector's trailing 12-month P/TB of 5.73X is also way above the Zacks SBIC & Commercial Finance industry's ratio.
Bain Capital: Headquartered in Boston, MA, BCSF is a specialty finance company that primarily invests in U.S. middle-market companies (firms having EBITDA in the range of $10-$150 million). It seeks to invest in senior investments with a first or second lien on collateral, senior first lien, stretch senior, senior second lien, unitranche, mezzanine debt, junior securities, other junior investments and secondary purchases of assets or portfolios.
As of March 31, 2025, Bain Capital had a total principal debt outstanding of $1.46 billion, significantly higher than the cash and cash equivalents (including foreign cash) of $38.4 million. The company had $544.6 million of undrawn investment commitments as of March 31, 2025.
The fair value of BCSF's total investment portfolio was $2.45 billion as of March 31, 2025, and consisted of investments in 176 portfolio companies across more than 30 different industries. Net asset value (NAV) was $17.64 per share on the same date.
Bain Capital has a market cap of $956.2 million. Shares of this Zacks Rank #2 (Buy) company have lost 13.6% in the past six months. The Zacks Consensus Estimate for 2025 earnings has remained unchanged over the past month. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
PennantPark Investment: Specializes in direct and mezzanine investments in middle market companies, PNNT seeks to invest between $10 million and $100 million across the capital structure (senior secured loans, subordinated debt, and other investments) in its portfolio companies with EBITDA between $10 million and $50 million.
As of Dec. 31, 2024, PennantPark Investment had total investments (fair value) of $1.3 billion in 158 portfolio companies. Additionally, NAV as of the same day was $7.57 per share.
The Miami Beach, FL-based company had $464.5 million in outstanding borrowings under the credit facility. It had $55.9 million in cash and cash equivalents.
PennantPark Investment has a market cap of $418.6 million. Over the past six months, the company's shares have risen 10.8%. Over the past 30 days, the Zacks Consensus Estimate for fiscal 2025 earnings has remained unchanged. The stock has a Zacks Rank of 2.
Stellus Capital Investment: Specializing in investments in private middle-market companies, Stellus Capital Investment invests through first lien, second lien, unitranche and mezzanine debt financing, often with a corresponding equity investment. Carrying a Zacks Rank #2, SCM seeks to invest in companies with an EBITDA between $5 million and $50 million.
As of Dec. 31, 2024, Stellus Capital Investment had total investments (fair value) of $953.5 million in 105 portfolio companies. Additionally, NAV was $13.46 per share on the same date.
Further, at December 2024-end, Houston, TX-based SCM had $175.4 million in outstanding borrowings under the credit facility. Further, cash and foreign currencies were $20.1 million as of the same date.
The company's shares have declined 5.7% over the past six months. The Zacks Consensus Estimate for 2025 earnings has remained unchanged over the past 30 days. SCM has a market cap of $368.3 million.
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PennantPark Investment Corporation (PNNT) : Free Stock Analysis Report
Stellus Capital Investment Corporation (SCM) : Free Stock Analysis Report
Bain Capital Specialty Finance, Inc. (BCSF) : Free Stock Analysis Report
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