Invesco Mortgage Capital Inc. (NYSE:IVR) and New Senior Investment Group Inc. (NYSE:SNR) are the two most active stocks in the REIT – Diversified industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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. Invesco Mortgage Capital Inc. (IVR) has an EBITDA margin of 105.8%, compared to an EBITDA margin of 49.51% for New Senior Investment Group Inc. (SNR). This suggests that IVR underlying business is more profitable. IVR’s ROI is 1.80% while SNR has a ROI of -3.10%. The interpretation is that IVR’s business generates a higher return on investment than SNR’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. IVR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.35. Comparatively, SNR’s free cash flow per share was -0.06. On a percent-of-sales basis, IVR’s free cash flow was 0.01% while SNR converted -0% of its revenues into cash flow. This means that, for a given level of sales, IVR 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. IVR’s debt-to-equity ratio is 6.84 versus a D/E of 3.96 for SNR. IVR is therefore the more solvent of the two companies, and has lower financial risk.
IVR trades at a forward P/E of 10.71, a P/B of 0.93, and a P/S of 3.96, compared to a forward P/B of 1.43, and a P/S of 1.62 for SNR. IVR is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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”. IVR is currently priced at a -2.84% to its one-year price target of $17.58. Comparatively, SNR is -17.87% relative to its price target of $11.25. This suggests that SNR 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 2.50 for IVR and 2.30 for SNR, which implies that analysts are more bullish on the outlook for IVR.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. IVR has a beta of 0.84.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. IVR has a short ratio of 1.75 compared to a short interest of 3.80 for SNR. This implies that the market is currently less bearish on the outlook for IVR.
Invesco Mortgage Capital Inc. (NYSE:IVR) beats New Senior Investment Group Inc. (NYSE:SNR) on a total of 6 of the 10 factors compared between the two stocks. IVR is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, IVR has better sentiment signals based on short interest.