It’s hard to say what kind of market we’re in these days.
The NASDAQ-100 — the index that contains most of the big U.S. tech stocks — has risen more than 20%, so it’s in a bull market. As for global and Canadian markets, those are much harder calls. The TSX Composite Index is only up 3.8% this year. That’s not exactly what we’d call a raging bull. However, it fell less than the U.S. markets did last year, so it has done reasonably well.
In the long run, it’s quite hard to predict whether the overall markets will be bullish or bearish. Warren Buffett says that he can’t do it, so you probably can’t do it either. Fortunately, it isn’t necessary to do so. If you invest in high-quality assets, you can trust that they’ll prevail over time, whether the overall market sentiment is bullish, bearish, or somewhere in between.
In this article, I’ll explore one U.S. financial stock that I’m buying — as well as a similar Canadian stock you can consider if you prefer to stick to domestic names.
Oaktree Specialty Lending
Oaktree Specialty Lending (NASDAQ: OCSL) is an American non-bank lender that lends money to small- to medium-sized companies. Its loan portfolio is unique in that it lends a plurality of its funds to software companies, which many lenders won’t touch. This gives OCSL a unique market niche that other financials don’t have much of a piece of.
One advantage that OCSL has over the big banks is its financing. The company does not rely on deposits that people can withdraw in seconds; it issues debt of its own, with set terms to maturity. So, it doesn’t need to worry about liquidity as much as your typical bank does. As we all saw in the spring 2023 U.S. banking crisis, that’s a big advantage. In March and April of this year, several U.S. banks defaulted after they suffered bank runs and lacked the liquidity to cover them. That sort of thing is not a risk to OCSL or its shareholders.
Super cheap
One thing that OCSL stock has going for it is the fact that it’s cheap. At today’s prices, it trades at
- 8.45 times earnings;
- 3.96 times revenue;
- 1.03 times book value; and
- 30.4 times operating cash flow.
Apart from the cash flow multiple, these ratios are very low, suggesting that investors who buy OCSL today aren’t paying too high a price.
High-quality loans
Another thing that OCSL has going for it is its high-quality loans. 88% of its portfolio is first or second lien loans/bonds. A “lien” is a claim against assets; so 88% of OCSL’s portfolio has collateral backing it. This is a good thing for investors, because it means that Oaktree can go after most of its borrowers’ assets should they default.
A similar Canadian play
If you’re a Canadian investor looking for a Canadian financial play that’s similar to Oaktree Specialty Lending, you could look into First National Financial (TSX: FN).
First National Financial is, like Oaktree Specialty Lending, a non-bank lender. In other words, it issues bonds and borrows from banks to finance its loans. So, its liquidity risk is, like Oaktree’s, less than that of a bank. Where FN differs is its client base. OCSL lends money to consumers rather than businesses. Specifically, it issues mortgages. Its business is doing quite well this year. In its most recent quarter, FN’s revenue increased 26%, and its earnings increased 46% year over year. Overall, it’s not a bad showing from Canada’s very own non-bank lender.
