Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) and CYS Investments, Inc. (NYSE:CYS) are the two most active stocks in the REIT – Diversified industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect ARI to grow earnings at a 0.30% annual rate over the next 5 years. Comparatively, CYS is expected to grow at a -4.25% annual rate. All else equal, ARI’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Apollo Commercial Real Estate Finance, Inc. (ARI) has an EBITDA margin of 113.97%, compared to an EBITDA margin of -18.58% for CYS Investments, Inc. (CYS). This suggests that ARI underlying business is more profitable. ARI’s ROI is 5.80% while CYS has a ROI of 1.80%. The interpretation is that ARI’s business generates a higher return on investment than CYS’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. ARI’s free cash flow (“FCF”) per share for the trailing twelve months was -0.07. Comparatively, CYS’s free cash flow per share was +0.27. On a percent-of-sales basis, ARI’s free cash flow was -0% while CYS converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, CYS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. ARI’s debt-to-equity ratio is 0.73 versus a D/E of 7.38 for CYS. CYS is therefore the more solvent of the two companies, and has lower financial risk.
ARI trades at a forward P/E of 8.77, a P/B of 0.80, and a P/S of 6.49, compared to a forward P/E of 9.29, a P/B of 1.03, and a P/S of 4.57 for CYS. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. ARI is currently priced at a 0.56% to its one-year price target of $18.00. Comparatively, CYS is 10.53% relative to its price target of $7.88. This suggests that ARI is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.80 for ARI and 3.60 for CYS, which implies that analysts are more bullish on the outlook for CYS.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. ARI has a beta of 0.68 and CYS’s beta is 0.73. ARI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. ARI has a short ratio of 3.73 compared to a short interest of 2.22 for CYS. This implies that the market is currently less bearish on the outlook for CYS.
Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) beats CYS Investments, Inc. (NYSE:CYS) on a total of 9 of the 13 factors compared between the two stocks. ARI is growing fastly, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, ARI is the cheaper of the two stocks on an earnings and book value, ARI is more undervalued relative to its price target. Finally, LTXB has better sentiment signals based on short interest.