MFA Financial, Inc. (NYSE:MFA) shares are up more than 3.93% this year and recently increased 1.93% or $0.15 to settle at $7.93. Chimera Investment Corporation (NYSE:CIM), on the other hand, is up 6.58% year to date as of 11/10/2017. It currently trades at $18.14 and has returned 2.31% during the past week.
MFA Financial, Inc. (NYSE:MFA) and Chimera Investment Corporation (NYSE:CIM) 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 MFA to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, CIM is expected to grow at a -0.32% annual rate. All else equal, MFA’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. , compared to an EBITDA margin of 57.64% for Chimera Investment Corporation (CIM). MFA’s ROI is 2.60% while CIM has a ROI of 3.40%. The interpretation is that CIM’s business generates a higher return on investment than MFA’s.
If there’s one thing investors care more about than earnings, it’s cash flow. MFA’s free cash flow (“FCF”) per share for the trailing twelve months was -0.15. Comparatively, CIM’s free cash flow per share was +0.12. On a percent-of-sales basis, MFA’s free cash flow was -0.01% while CIM converted 0% of its revenues into cash flow. This means that, for a given level of sales, CIM is able to generate more free cash flow for investors.
MFA’s debt-to-equity ratio is 2.14 versus a D/E of 4.56 for CIM. CIM is therefore the more solvent of the two companies, and has lower financial risk.
MFA trades at a forward P/E of 10.73, a P/B of 0.97, and a P/S of 5.64, compared to a forward P/E of 7.53, a P/B of 0.93, and a P/S of 3.06 for CIM. MFA is the expensive 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
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. MFA is currently priced at a -3.41% to its one-year price target of 8.21. Comparatively, CIM is -5.18% relative to its price target of 19.13. This suggests that CIM 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 2.70 for MFA and 3.00 for CIM, which implies that analysts are more bullish on the outlook for CIM.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. MFA has a beta of 0.71 and CIM’s beta is 0.92. MFA’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.MFA has a short ratio of 3.14 compared to a short interest of 4.05 for CIM. This implies that the market is currently less bearish on the outlook for MFA.
Chimera Investment Corporation (NYSE:CIM) beats MFA Financial, Inc. (NYSE:MFA) on a total of 7 of the 14 factors compared between the two stocks. CIM is growing fastly, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, CIM is the cheaper of the two stocks on an earnings, book value and sales basis, CIM is more undervalued relative to its price target. Finally, SRC has better sentiment signals based on short interest.