Saratoga Investment Corp (NYSE: SAR) and CM Finance (NASDAQ:CMFN) are both small-cap finance companies, but which is the better investment? We will compare the two companies based on the strength of their institutional ownership, valuation, risk, profitability, dividends, earnings and analyst recommendations.

Analyst Ratings

This is a summary of recent recommendations and price targets for Saratoga Investment Corp and CM Finance, as reported by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Saratoga Investment Corp 0 0 0 0 N/A
CM Finance 0 1 0 0 2.00

Dividends

Saratoga Investment Corp pays an annual dividend of $1.88 per share and has a dividend yield of 9.2%. CM Finance pays an annual dividend of $1.00 per share and has a dividend yield of 10.2%. Saratoga Investment Corp pays out 119.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. CM Finance pays out 60.2% of its earnings in the form of a dividend. CM Finance is clearly the better dividend stock, given its higher yield and lower payout ratio.

Valuation and Earnings

This table compares Saratoga Investment Corp and CM Finance’s top-line revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
Saratoga Investment Corp $33.96 million 3.59 $9.43 million $1.58 12.94
CM Finance N/A N/A N/A $1.66 5.93

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

Profitability

This table compares Saratoga Investment Corp and CM Finance’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Saratoga Investment Corp 26.84% 8.03% 3.19%
CM Finance 72.19% 10.11% 5.41%

Risk & Volatility

Saratoga Investment Corp has a beta of 0.5, indicating that its stock price is 50% less volatile than the S&P 500. Comparatively, CM Finance has a beta of 1.42, indicating that its stock price is 42% more volatile than the S&P 500.

Insider and Institutional Ownership

16.2% of Saratoga Investment Corp shares are held by institutional investors. Comparatively, 42.2% of CM Finance shares are held by institutional investors. 32.0% of Saratoga Investment Corp shares are held by insiders. Comparatively, 1.8% of CM Finance shares are held by insiders. Strong institutional ownership is an indication that endowments, hedge funds and large money managers believe a company is poised for long-term growth.

Summary

CM Finance beats Saratoga Investment Corp on 8 of the 11 factors compared between the two stocks.

Saratoga Investment Corp 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.

CM Finance Company Profile

CM Finance Inc is an externally managed, non-diversified closed-end management investment company. The Company is a specialty finance company that invests primarily in the debt of the United States middle-market companies. The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing in debt and related equity of privately held lower middle-market companies. As of June 30, 2016, the Company’s portfolio consisted of debt and equity investments in 22 portfolio companies. It invests in unitranche loans and standalone second and first lien loans, with an emphasis on floating rate debt. It also selectively invests in mezzanine loans/structured equity and in the equity of portfolio companies through warrants and other instruments.CM Investment Partners LLC is an external investment advisor of the Company.

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