New Residential Investment Corp. (NYSE:NRZ) and American Homes 4 Rent (NYSE:AMH) are the two most active stocks in the REIT – Residential industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect NRZ to grow earnings at a 0.63% annual rate over the next 5 years. Comparatively, AMH is expected to grow at a 14.40% annual rate. All else equal, AMH’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. New Residential Investment Corp. (NRZ) has an EBITDA margin of 83.28%, compared to an EBITDA margin of 48.83% for American Homes 4 Rent (AMH). This suggests that NRZ underlying business is more profitable. NRZ’s ROI is 3.50% while AMH has a ROI of -0.10%. The interpretation is that NRZ’s business generates a higher return on investment than AMH’s.
The value of a stock is simply the present value of its future free cash flows. NRZ’s free cash flow (“FCF”) per share for the trailing twelve months was -0.36. Comparatively, AMH’s free cash flow per share was +0.27. On a percent-of-sales basis, NRZ’s free cash flow was -9.25% while AMH converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, AMH is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. NRZ’s debt-to-equity ratio is 3.63 versus a D/E of 0.52 for AMH. NRZ is therefore the more solvent of the two companies, and has lower financial risk.
NRZ trades at a forward P/E of 8.07, a P/B of 1.20, and a P/S of 3.04, compared to a forward P/E of 117.84, a P/B of 1.21, and a P/S of 6.35 for AMH. NRZ 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. NRZ is currently priced at a -1.71% to its one-year price target of $17.57. Comparatively, AMH is -13.39% relative to its price target of $25.17. This suggests that AMH 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 1.90 for NRZ and 2.20 for AMH, which implies that analysts are more bullish on the outlook for AMH.
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. NRZ has a beta of 0.94 and AMH’s beta is 0.71. AMH’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. NRZ has a short ratio of 1.71 compared to a short interest of 3.86 for AMH. This implies that the market is currently less bearish on the outlook for NRZ.
New Residential Investment Corp. (NYSE:NRZ) beats American Homes 4 Rent (NYSE:AMH) on a total of 7 of the 13 factors compared between the two stocks. NRZ is more profitable and generates a higher return on investment. In terms of valuation, NRZ is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, NRZ has better sentiment signals based on short interest.