Sanchez Energy Corporation (NYSE:SN) shares are down more than -42.64% this year and recently decreased -5.12% or -$0.27 to settle at $4.91. SM Energy Company (NYSE:SM), on the other hand, is down -36.57% year to date as of 12/05/2017. It currently trades at $21.37 and has returned 14.56% during the past week.
Sanchez Energy Corporation (NYSE:SN) and SM Energy Company (NYSE:SM) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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. Sanchez Energy Corporation (SN) has an EBITDA margin of 40.34%. This suggests that SN underlying business is more profitable SN’s ROI is -19.00% while SM has a ROI of -11.10%. The interpretation is that SM’s business generates a higher return on investment than SN’s.
If there’s one thing investors care more about than earnings, it’s cash flow. SN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.48. Comparatively, SM’s free cash flow per share was -1.16. On a percent-of-sales basis, SN’s free cash flow was -0.01% while SM converted -10.64% of its revenues into cash flow. This means that, for a given level of sales, SN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. SN has a current ratio of 0.90 compared to 1.50 for SM. This means that SM can more easily cover its most immediate liabilities over the next twelve months.
SN trades at a forward P/E of 7.44, and a P/S of 0.68, compared to a P/B of 1.01, and a P/S of 1.80 for SM. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
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. SN has a beta of 1.69 and SM’s beta is 3.05. SN’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. SN has a short ratio of 7.12 compared to a short interest of 4.15 for SM. This implies that the market is currently less bearish on the outlook for SM.
Sanchez Energy Corporation (NYSE:SN) beats SM Energy Company (NYSE:SM) on a total of 8 of the 13 factors compared between the two stocks. SN is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, SN is the cheaper of the two stocks on book value and sales basis, Finally, CNX has better sentiment signals based on short interest.