Halcon Resources Corporation (NYSE:HK) and Ring Energy, Inc. (NYSE:REI) are the two most active stocks in the Oil & Gas Drilling & Exploration industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. HK’s ROI is -25.10% while REI has a ROI of -12.80%. The interpretation is that REI’s business generates a higher return on investment than HK’s.
The value of a stock is simply the present value of its future free cash flows. HK’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, REI’s free cash flow per share was -0.86. On a percent-of-sales basis, HK’s free cash flow was -0% while REI converted -0.15% of its revenues into cash flow. This means that, for a given level of sales, HK 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. HK has a current ratio of 0.70 compared to 0.90 for REI. This means that REI can more easily cover its most immediate liabilities over the next twelve months. HK’s debt-to-equity ratio is 0.00 versus a D/E of 0.00 for REI. HK is therefore the more solvent of the two companies, and has lower financial risk.
HK trades at a forward P/E of 31.28, a P/B of 1.20, and a P/S of 1.83, compared to a forward P/E of 24.85, a P/B of 2.21, and a P/S of 15.98 for REI. 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. HK is currently priced at a -32.93% to its one-year price target of $9.14. Comparatively, REI is -25.31% relative to its price target of $17.90. This suggests that HK 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 2.10 for HK and 1.80 for REI, which implies that analysts are more bullish on the outlook for HK.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. HK has a beta of 3.94 and REI’s beta is 0.74. REI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. HK has a short ratio of 1.98 compared to a short interest of 10.99 for REI. This implies that the market is currently less bearish on the outlook for HK.
Ring Energy, Inc. (NYSE:REI) beats Halcon Resources Corporation (NYSE:HK) on a total of 7 of the 13 factors compared between the two stocks. REI has higher cash flow per share, generates a higher return on investment, higher liquidity and has lower financial risk. Finally, RDC has better sentiment signals based on short interest.