Colony NorthStar, Inc. (NYSE:CLNS) and MFA Financial, Inc. (NYSE:MFA) 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.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Colony NorthStar, Inc. (CLNS) has an EBITDA margin of 53.66%, compared to an EBITDA margin of 134.79% for MFA Financial, Inc. (MFA). This suggests that MFA underlying business is more profitable. CLNS’s ROI is 0.80% while MFA has a ROI of 2.60%. The interpretation is that MFA’s business generates a higher return on investment than CLNS’s.
The value of a stock is simply the present value of its future free cash flows. CLNS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.13. Comparatively, MFA’s free cash flow per share was -0.07. On a percent-of-sales basis, CLNS’s free cash flow was 0.02% while MFA converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, CLNS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. CLNS’s debt-to-equity ratio is 1.40 versus a D/E of 2.18 for MFA. MFA is therefore the more solvent of the two companies, and has lower financial risk.
CLNS trades at a forward P/E of 29.08, a P/B of 0.93, and a P/S of 4.78, compared to a forward P/E of 11.70, a P/B of 1.04, and a P/S of 6.05 for MFA. 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”. CLNS is currently priced at a -23.85% to its one-year price target of $16.69. Comparatively, MFA is 5.88% relative to its price target of $8.33. This suggests that CLNS 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 2.20 for CLNS and 2.70 for MFA, which implies that analysts are more bullish on the outlook for MFA.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. MFA’s beta is 0.73.
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. CLNS has a short ratio of 4.08 compared to a short interest of 3.48 for MFA. This implies that the market is currently less bearish on the outlook for MFA.
Colony NorthStar, Inc. (NYSE:CLNS) beats MFA Financial, Inc. (NYSE:MFA) on a total of 7 of the 11 factors compared between the two stocks. CLNS has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, CLNS is the cheaper of the two stocks on book value and sales basis, CLNS is more undervalued relative to its price target. Finally, SRC has better sentiment signals based on short interest.