MTGE Investment Corp. (NASDAQ:MTGE) and AG Mortgage Investment Trust, Inc. (NYSE:MITT) 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.
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 MTGE to grow earnings at a 2.00% annual rate over the next 5 years. Comparatively, MITT is expected to grow at a -1.68% annual rate. All else equal, MTGE’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. MTGE Investment Corp. (MTGE) has an EBITDA margin of 82.07%, compared to an EBITDA margin of 112.39% for AG Mortgage Investment Trust, Inc. (MITT). This suggests that MITT underlying business is more profitable. MTGE’s ROI is 0.90% while MITT has a ROI of 2.60%. The interpretation is that MITT’s business generates a higher return on investment than MTGE’s.
The value of a stock is simply the present value of its future free cash flows. MTGE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, MITT’s free cash flow per share was +0.02. On a percent-of-sales basis, MTGE’s free cash flow was 0% while MITT converted 0% of its revenues into cash flow. This means that, for a given level of sales, MTGE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. MTGE’s debt-to-equity ratio is 5.26 versus a D/E of 4.36 for MITT. MTGE is therefore the more solvent of the two companies, and has lower financial risk.
MTGE trades at a forward P/E of 9.59, a P/B of 0.97, and a P/S of 6.13, compared to a forward P/E of 10.41, a P/B of 1.02, and a P/S of 4.41 for MITT. 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”. MTGE is currently priced at a -1.63% to its one-year price target of $19.67. Comparatively, MITT is 6.67% relative to its price target of $18.00. This suggests that MTGE 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 MTGE and 3.00 for MITT, which implies that analysts are more bullish on the outlook for MITT.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. MTGE has a beta of 0.51 and MITT’s beta is 0.94. MTGE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. MTGE has a short ratio of 2.38 compared to a short interest of 4.09 for MITT. This implies that the market is currently less bearish on the outlook for MTGE.
MTGE Investment Corp. (NASDAQ:MTGE) beats AG Mortgage Investment Trust, Inc. (NYSE:MITT) on a total of 8 of the 13 factors compared between the two stocks. MTGE is growing fastly and has higher cash flow per share. In terms of valuation, MTGE is the cheaper of the two stocks on an earnings and book value, MTGE is more undervalued relative to its price target. Finally, MTGE has better sentiment signals based on short interest.