Annaly Capital Management, Inc. (NYSE:NLY) and Vornado Realty Trust (NYSE:VNO) 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 NLY to grow earnings at a -2.83% annual rate over the next 5 years. Comparatively, VNO is expected to grow at a 23.85% annual rate. All else equal, VNO’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 Return on Investment (ROI) as measures of profitability and return. NLY’s ROI is 1.70% while VNO has a ROI of 6.30%. The interpretation is that VNO’s business generates a higher return on investment than NLY’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. NLY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.56. Comparatively, VNO’s free cash flow per share was -0.18. On a percent-of-sales basis, NLY’s free cash flow was -26.05% while VNO converted -1.36% of its revenues into cash flow. This means that, for a given level of sales, VNO 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. NLY’s debt-to-equity ratio is 6.14 versus a D/E of 1.84 for VNO. NLY is therefore the more solvent of the two companies, and has lower financial risk.
NLY trades at a forward P/E of 10.47, a P/B of 1.11, and a P/S of 3.38, compared to a forward P/E of 59.65, a P/B of 2.52, and a P/S of 5.91 for VNO. NLY 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. NLY is currently priced at a 10.83% to its one-year price target of $11.17. Comparatively, VNO is -10.59% relative to its price target of $87.40. This suggests that VNO 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 3.40 for NLY and 2.30 for VNO, which implies that analysts are more bullish on the outlook for NLY.
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. NLY has a beta of 0.34 and VNO’s beta is 1.03. NLY’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. NLY has a short ratio of 3.49 compared to a short interest of 3.29 for VNO. This implies that the market is currently less bearish on the outlook for VNO.
Vornado Realty Trust (NYSE:VNO) beats Annaly Capital Management, Inc. (NYSE:NLY) on a total of 9 of the 13 factors compared between the two stocks. VNO , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, NLY is the cheaper of the two stocks on an earnings, book value and sales basis, VNO is more undervalued relative to its price target. Finally, VNO has better sentiment signals based on short interest.