MFA Financial, Inc. (NYSE:MFA) and Starwood Property Trust, Inc. (NYSE:STWD) are the two most active stocks in the REIT – Diversified 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect MFA to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, STWD is expected to grow at a 3.80% annual rate. All else equal, MFA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. MFA Financial, Inc. (MFA) has an EBITDA margin of 134.79%, compared to an EBITDA margin of 94.8% for Starwood Property Trust, Inc. (STWD). This suggests that MFA underlying business is more profitable. MFA’s ROI is 2.60% while STWD has a ROI of 1.10%. The interpretation is that MFA’s business generates a higher return on investment than STWD’s.
Cash is king when it comes to investing. MFA’s free cash flow (“FCF”) per share for the trailing twelve months was -0.07. Comparatively, STWD’s free cash flow per share was -1.04. On a percent-of-sales basis, MFA’s free cash flow was -0.01% while STWD converted -0.03% of its revenues into cash flow. This means that, for a given level of sales, MFA is able to generate more free cash flow for investors.
MFA’s debt-to-equity ratio is 2.18 versus a D/E of 1.50 for STWD. MFA is therefore the more solvent of the two companies, and has lower financial risk.
MFA trades at a forward P/E of 11.63, a P/B of 1.03, and a P/S of 6.00, compared to a forward P/E of 10.08, a P/B of 1.26, and a P/S of 7.10 for STWD. 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. MFA is currently priced at a 5.28% to its one-year price target of $8.33. Comparatively, STWD is -7.52% relative to its price target of $23.79. This suggests that STWD 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 2.70 for MFA and 2.30 for STWD, which implies that analysts are more bullish on the outlook for MFA.
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. MFA has a beta of 0.73 and STWD’s beta is 0.57. STWD’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. MFA has a short ratio of 3.09 compared to a short interest of 9.48 for STWD. This implies that the market is currently less bearish on the outlook for MFA.
MFA Financial, Inc. (NYSE:MFA) beats Starwood Property Trust, Inc. (NYSE:STWD) on a total of 8 of the 13 factors compared between the two stocks. MFA is growing fastly, 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, MFA is the cheaper of the two stocks on book value and sales basis, Finally, MFA has better sentiment signals based on short interest.