Markets

Critical Comparison: Ocwen Financial Corporation (OCN) vs. Hercules Capital, Inc. (HTGC)

Ocwen Financial Corporation (NYSE:OCN) and Hercules Capital, Inc. (NYSE:HTGC) are the two most active stocks in the Mortgage Investment industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect OCN to grow earnings at a 3.00% annual rate over the next 5 years. Comparatively, HTGC is expected to grow at a 5.00% annual rate. All else equal, HTGC’s higher growth rate would imply a greater potential for capital appreciation.

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. OCN’s ROI is 2.50% while HTGC has a ROI of 6.40%. The interpretation is that HTGC’s business generates a higher return on investment than OCN’s.

Cash Flow 

If there’s one thing investors care more about than earnings, it’s cash flow. OCN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.58. Comparatively, HTGC’s free cash flow per share was +0.05. On a percent-of-sales basis, OCN’s free cash flow was 5.47% while HTGC converted 0% of its revenues into cash flow. This means that, for a given level of sales, OCN is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. OCN’s debt-to-equity ratio is 11.59 versus a D/E of 0.92 for HTGC. OCN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

OCN trades at a forward P/B of 0.60, and a P/S of 0.28, compared to a forward P/E of 9.75, a P/B of 1.29, and a P/S of 5.69 for HTGC. 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. OCN is currently priced at a -11.99% to its one-year price target of $3.17. Comparatively, HTGC is -13.33% relative to its price target of $14.78. This suggests that HTGC 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 3.00 for OCN and 2.20 for HTGC, which implies that analysts are more bullish on the outlook for OCN.

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. OCN has a beta of 1.21 and HTGC’s beta is 0.83. HTGC’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. OCN has a short ratio of 11.18 compared to a short interest of 2.66 for HTGC. This implies that the market is currently less bearish on the outlook for HTGC.

Summary

Hercules Capital, Inc. (NYSE:HTGC) beats Ocwen Financial Corporation (NYSE:OCN) on a total of 7 of the 11 factors compared between the two stocks. HTGC has higher cash flow per share, generates a higher return on investment and has lower financial risk. HTGC is more undervalued relative to its price target. Finally, HTGC has better sentiment signals based on short interest.

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