Investors Real Estate Trust (NYSE:IRET) and PennyMac Mortgage Investment Trust (NYSE:PMT) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect IRET to grow earnings at a 6.00% annual rate over the next 5 years. Comparatively, PMT is expected to grow at a 5.00% annual rate. All else equal, IRET’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Investors Real Estate Trust (IRET) has an EBITDA margin of 28.92%, compared to an EBITDA margin of 38.63% for PennyMac Mortgage Investment Trust (PMT). This suggests that PMT underlying business is more profitable. IRET’s ROI is -1.40% while PMT has a ROI of 1.20%. The interpretation is that PMT’s business generates a higher return on investment than IRET’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. IRET’s free cash flow (“FCF”) per share for the trailing twelve months was +0.00. Comparatively, PMT’s free cash flow per share was -1.89. On a percent-of-sales basis, IRET’s free cash flow was 0% while PMT converted -0.03% of its revenues into cash flow. This means that, for a given level of sales, IRET is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. IRET’s debt-to-equity ratio is 1.60 versus a D/E of 3.04 for PMT. PMT is therefore the more solvent of the two companies, and has lower financial risk.
IRET trades at a forward P/E of 622.00, a P/B of 1.68, and a P/S of 4.17, compared to a forward P/E of 10.05, a P/B of 0.80, and a P/S of 2.44 for PMT. IRET is the expensive of the two stocks on an earnings, book value and sales basis. 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. IRET is currently priced at a -8.93% to its one-year price target of $6.83. Comparatively, PMT is 3.02% relative to its price target of $16.89. This suggests that IRET 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 IRET and 2.70 for PMT, which implies that analysts are more bullish on the outlook for PMT.
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. IRET has a beta of 0.83 and PMT’s beta is 0.54. PMT’s shares are therefore the less volatile of the two stocks.
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. IRET has a short ratio of 6.72 compared to a short interest of 2.00 for PMT. This implies that the market is currently less bearish on the outlook for PMT.
PennyMac Mortgage Investment Trust (NYSE:PMT) beats Investors Real Estate Trust (NYSE:IRET) on a total of 7 of the 13 factors compared between the two stocks. PMT is growing fastly and generates a higher return on investment. In terms of valuation, PMT is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, PMT has better sentiment signals based on short interest.