SAR

We rate SARATOGA INVESTMENT CORP. (SAR) as a Hold with a composite score of 55.3/100 at a current price of $23.11. The stock presents a mixed quantitative picture — neither compelling enough to warrant new accumulation nor weak enough to justify selling for existing holders. Our factors are split, and the overall profile suggests patience is warranted.

The rating is primarily driven by strength in momentum (85th percentile) and stability (78th percentile), which together account for the majority of the composite score. Offsetting weakness in investment (28th percentile) and quality (30th percentile) tempers our overall conviction. We assign a No Moat rating (11/100), High uncertainty, and Standard capital allocation.

Key items to watch: whether strong momentum is fundamentally supported by revenue trends; balance sheet deleveraging progress. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

SARATOGA INVESTMENT CORP. holds a top-quartile position (#2 of 38) within the Financial sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 55.3/100 places it at rank #1225 in our full 7,333-stock universe. At $362M in market capitalization, SARATOGA INVESTMENT CORP. is a small-cap player in the Financial space, which limits certain scale advantages but may allow for more agile strategic execution.

Despite positive momentum (85th percentile), revenue contraction of -11% creates a divergence between price action and fundamental trajectory. This divergence suggests either that the market is looking through near-term weakness or that technical factors are temporarily inflating the stock. Investors should assess whether the revenue decline reflects cyclical weakness or structural challenges.

The margin cascade tells an important story: gross margins of 46% (-53.9pp vs sector) narrow to operating margins of 54% (-5.3pp vs sector) and net margins of 185.7%, yielding a gross-to-net conversion rate of 402%. This efficient conversion suggests well-controlled operating costs and limited margin leakage between the gross and net levels.

At a current price of $23.11, SARATOGA INVESTMENT CORP. is trading near fair value based on current fundamentals. Our value factor score of 69/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. Valuation metrics are mixed, with no strong signal of mispricing in either direction.

The stock currently trades at a P/E of 1.4x (a 86% discount to the sector median of 9.8x), EV/EBITDA of 7.6x (discounted to peers), P/B of 0.9x, P/S of 2.6x. The below-sector P/E suggests possible undervaluation or the market pricing in near-term headwinds.

We assign a High uncertainty rating to SARATOGA INVESTMENT CORP.. Key risk factors include significant leverage (263% debt-to-equity), weak quality scores (30th percentile), low beta of 0.61 — while defensive, this may indicate limited upside participation in bull markets. The wide range of potential outcomes widens our fair value estimate and increases the possibility of permanent capital impairment. Investors considering this name should size positions accordingly and demand a meaningful margin of safety before initiating.

Specific risk factors that inform our assessment include: significant leverage (263% debt-to-equity); weak quality scores (30th percentile); low beta of 0.61 — while defensive, this may indicate limited upside participation in bull markets. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 78th percentile and quality factor at the 30th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: healthy gross margins of 46% provide a buffer against cost pressures; above-average stability (78th percentile) suggests predictable business dynamics; a 17.03% dividend yield anchors total return. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile warrants caution and disciplined position management.

We rate SARATOGA INVESTMENT CORP.'s capital allocation as Standard. Management has shown adequate — though not exceptional — stewardship of shareholder capital. Returns on equity stand at 65.8%, and the balance sheet is managed within acceptable parameters (D/E: 263%). Exemplary allocators typically sustain ROE above 20% and D/E below 50%; SARATOGA INVESTMENT CORP. falls short on at least one dimension.

There is room for improvement in optimizing the capital structure or enhancing shareholder returns. The 17.03% dividend yield provides some income return, but the overall capital allocation framework would benefit from either higher reinvestment returns, improved balance sheet efficiency, or increased shareholder distributions. We will monitor for signs of strategic improvement that could warrant an upgrade.

In summary, SARATOGA INVESTMENT CORP. receives a Hold rating with a composite score of 55.3/100 (rank #1225 of 7,333). Our quantitative framework assigns a No Moat (11/100, trend: stable), High uncertainty, and Standard capital allocation. The average factor score across quality, value, momentum, stability, and investment is 58/100.

Our analysis supports a neutral stance on SARATOGA INVESTMENT CORP.. While the quantitative profile is not weak enough to warrant selling, it lacks the multi-factor strength required for a buy recommendation. Existing holders should maintain positions and monitor for catalysts — either fundamental improvement or valuation compression — that would shift the risk-reward balance.