TSLX

We rate Sixth Street Specialty Lending, Inc. (TSLX) as a Reduce with a composite score of 42.3/100 at a current price of $18.20. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in stability (69th percentile) and momentum (54th percentile), which together account for the majority of the composite score. Offsetting weakness in investment (29th percentile) and quality (31th percentile) tempers our overall conviction. We assign a No Moat rating (27/100), Medium uncertainty, and Standard capital allocation.

Key items to watch: 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.

Sixth Street Specialty Lending, Inc. holds an above-average position (#18 of 38) within the Financial sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 42.3/100 places it at rank #3225 in our full 7,333-stock universe. At $2.2B in market capitalization, Sixth Street Specialty Lending, Inc. is a mid-cap player in the Financial space, which limits certain scale advantages but may allow for more agile strategic execution.

Revenue contraction of -14% combined with momentum at the 54th percentile paints a cautious picture of the near-term business outlook. The market appears to be pricing in continued challenges, and a catalyst for reversal is not clearly visible from current data.

The margin cascade tells an important story: gross margins of 100% (0.0pp vs sector) narrow to operating margins of 87% (+27.9pp vs sector) and net margins of 87.1%, yielding a gross-to-net conversion rate of 87%. This efficient conversion suggests well-controlled operating costs and limited margin leakage between the gross and net levels.

At a current price of $18.20, Sixth Street Specialty Lending, Inc. is trading near fair value based on current fundamentals. Our value factor score of 43/100 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 9.5x (roughly in line with the sector median of 9.8x), EV/EBITDA of 24.7x (at a premium), P/B of 1.1x, P/S of 10.5x. The below-sector P/E suggests possible undervaluation or the market pricing in near-term headwinds.

We assign a Medium uncertainty rating to Sixth Street Specialty Lending, Inc.. The stock presents a balanced risk profile: significant leverage (108% debt-to-equity) and weak quality scores (31th percentile). While not risk-free, the core business fundamentals are adequate to withstand moderate economic stress, and the range of potential outcomes around our fair value estimate is manageable.

Specific risk factors that inform our assessment include: significant leverage (108% debt-to-equity); weak quality scores (31th percentile); low beta of 0.60 — 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 69th percentile and quality factor at the 31th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: healthy gross margins of 100% provide a buffer against cost pressures; above-average stability (69th percentile) suggests predictable business dynamics; a 9.06% 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 is favorable for long-term investors.

We rate Sixth Street Specialty Lending, Inc.'s capital allocation as Standard. Management has shown adequate — though not exceptional — stewardship of shareholder capital. Returns on equity stand at 11.3%, and the balance sheet is managed within acceptable parameters (D/E: 108%). Exemplary allocators typically sustain ROE above 20% and D/E below 50%; Sixth Street Specialty Lending, Inc. falls short on at least one dimension.

There is room for improvement in optimizing the capital structure or enhancing shareholder returns. The 9.06% 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, Sixth Street Specialty Lending, Inc. receives a Reduce rating with a composite score of 42.3/100 (rank #3225 of 7,333). Our quantitative framework assigns a No Moat (27/100, trend: stable), Medium uncertainty, and Standard capital allocation. The average factor score across quality, value, momentum, stability, and investment is 45/100.

Our analysis does not support a constructive view on Sixth Street Specialty Lending, Inc. at this time. The combination of limited competitive advantages, medium uncertainty, and standard capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.