Resource Capital Corp. (NYSE:RSO) and Gladstone Commercial Corporation (NASDAQ:GOOD) are the two most active stocks in the REIT – Diversified 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect RSO to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, GOOD is expected to grow at a 6.00% annual rate. All else equal, GOOD’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. Resource Capital Corp. (RSO) has an EBITDA margin of 71.18%, compared to an EBITDA margin of 61.42% for Gladstone Commercial Corporation (GOOD). This suggests that RSO underlying business is more profitable. RSO’s ROI is -1.10% while GOOD has a ROI of 4.10%. The interpretation is that GOOD’s business generates a higher return on investment than RSO’s.
Cash is king when it comes to investing. RSO’s free cash flow (“FCF”) per share for the trailing twelve months was -1.19. Comparatively, GOOD’s free cash flow per share was -0.12. On a percent-of-sales basis, RSO’s free cash flow was -0.06% while GOOD converted -0% of its revenues into cash flow. This means that, for a given level of sales, GOOD 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. RSO’s debt-to-equity ratio is 1.52 versus a D/E of 2.03 for GOOD. GOOD is therefore the more solvent of the two companies, and has lower financial risk.
RSO trades at a forward P/E of 69.47, a P/B of 0.46, and a P/S of 3.25, compared to a forward P/E of 175.00, a P/B of 2.22, and a P/S of 6.62 for GOOD. RSO is the cheaper 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. RSO is currently priced at a -3.07% to its one-year price target of $10.75. Comparatively, GOOD is -7.69% relative to its price target of $22.75. This suggests that GOOD 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 RSO and 2.50 for GOOD, which implies that analysts are more bullish on the outlook for RSO.
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. RSO has a beta of 1.14 and GOOD’s beta is 0.88. GOOD’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. RSO has a short ratio of 4.01 compared to a short interest of 1.08 for GOOD. This implies that the market is currently less bearish on the outlook for GOOD.
Gladstone Commercial Corporation (NASDAQ:GOOD) beats Resource Capital Corp. (NYSE:RSO) on a total of 8 of the 13 factors compared between the two stocks. GOOD is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, RSO is the cheaper of the two stocks on an earnings, book value and sales basis, GOOD is more undervalued relative to its price target. Finally, GOOD has better sentiment signals based on short interest.