Annaly Capital Management, Inc. (NYSE:NLY) shares are up more than 14.14% this year and recently increased 1.25% or $0.14 to settle at $11.38. VEREIT, Inc. (NYSE:VER), on the other hand, is down -2.72% year to date as of 11/10/2017. It currently trades at $8.23 and has returned 2.11% during the past week.
Annaly Capital Management, Inc. (NYSE:NLY) and VEREIT, Inc. (NYSE:VER) are the two most active stocks in the REIT – Diversified 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect NLY to grow earnings at a -0.43% annual rate over the next 5 years. Comparatively, VER is expected to grow at a 5.00% annual rate. All else equal, VER’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., compared to an EBITDA margin of 28.79% for VEREIT, Inc. (VER). NLY’s ROI is 1.70% while VER has a ROI of 0.40%. The interpretation is that NLY’s business generates a higher return on investment than VER’s.
Cash is king when it comes to investing. On a percent-of-sales basis, NLY’s free cash flow was 0% while VER converted 3.36% of its revenues into cash flow. This means that, for a given level of sales, VER is able to generate more free cash flow for investors.
NLY’s debt-to-equity ratio is 6.18 versus a D/E of 0.73 for VER. NLY is therefore the more solvent of the two companies, and has lower financial risk.
NLY trades at a forward P/E of 9.66, a P/B of 0.98, and a P/S of 3.50, compared to a P/B of 0.99, and a P/S of 5.85 for VER. 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. NLY is currently priced at a -0.44% to its one-year price target of 11.43. Comparatively, VER is -11.6% relative to its price target of 9.31. This suggests that VER 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 2.50 for VER, 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 0.29 and VER’s beta is 0.74. NLY’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. NLY has a short ratio of 2.18 compared to a short interest of 2.24 for VER. This implies that the market is currently less bearish on the outlook for NLY.
VEREIT, Inc. (NYSE:VER) beats Annaly Capital Management, Inc. (NYSE:NLY) on a total of 7 of the 14 factors compared between the two stocks. VER is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. VER is more undervalued relative to its price target. Finally, SBRA has better sentiment signals based on short interest.