Spirit Realty Capital, Inc. (NYSE:SRC) and RAIT Financial Trust (NYSE:RAS) 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 SRC to grow earnings at a 37.47% annual rate over the next 5 years. Comparatively, RAS is expected to grow at a -8.00% annual rate. All else equal, SRC’s higher growth rate would imply a greater potential for capital appreciation.
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 Return on Investment (ROI) to measure this. SRC’s ROI is 0.60% while RAS has a ROI of -4.00%. The interpretation is that SRC’s business generates a higher return on investment than RAS’s.
The value of a stock is simply the present value of its future free cash flows. On a percent-of-sales basis, SRC’s free cash flow was 0% while RAS converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, SRC 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. SRC’s debt-to-equity ratio is 1.15 versus a D/E of 8.14 for RAS. RAS is therefore the more solvent of the two companies, and has lower financial risk.
SRC trades at a forward P/E of 33.41, a P/B of 1.22, and a P/S of 6.00, compared to a forward P/B of 0.31, and a P/S of 0.37 for RAS. 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. SRC is currently priced at a -5.65% to its one-year price target of $9.03. Comparatively, RAS is -46.09% relative to its price target of $1.28. This suggests that RAS 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 2.40 for SRC and 3.30 for RAS, which implies that analysts are more bullish on the outlook for RAS.
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. SRC has a beta of 0.58 and RAS’s beta is 1.64. SRC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. SRC has a short ratio of 1.26 compared to a short interest of 2.74 for RAS. This implies that the market is currently less bearish on the outlook for SRC.
Spirit Realty Capital, Inc. (NYSE:SRC) beats RAIT Financial Trust (NYSE:RAS) on a total of 9 of the 12 factors compared between the two stocks. SRC is growing fastly, 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. Finally, SRC has better sentiment signals based on short interest.