Ares Capital has been treading water for the past six months, recording a small loss of 3.5% while holding steady at $22.41. The stock also fell short of the S&P 500’s 10.5% gain during that period.
Is now the time to buy Ares Capital, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Ares Capital Will Underperform?
We're swiping left on Ares Capital for now. Here is one reason why ARCC doesn't excite us and a stock we'd rather own.
EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Ares Capital’s EPS grew at a weak 2.7% compounded annual growth rate over the last five years, lower than its 15.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Ares Capital doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 11.1× forward P/E (or $22.41 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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