Alibaba Group Holding Limited (NYSE:BABA) shares are up more than 13.68% this year and recently decreased -1.05% or -$2.09 to settle at $196.02. Companhia de Saneamento Basico do Estado de Sao Paulo – SABESP (NYSE:SBS), on the other hand, is down -26.39% year to date as of 05/17/2018. It currently trades at $7.46 and has returned -13.05% during the past week.
Alibaba Group Holding Limited (NYSE:BABA) and Companhia de Saneamento Basico do Estado de Sao Paulo – SABESP (NYSE:SBS) are the two most active stocks in the Specialty Retail, Other 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.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect BABA to grow earnings at a 4.85% annual rate over the next 5 years. Comparatively, SBS is expected to grow at a 10.71% annual rate. All else equal, SBS’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Alibaba Group Holding Limited (BABA) has an EBITDA margin of 39.61%. This suggests that BABA underlying business is more profitable BABA’s ROI is 10.40% while SBS has a ROI of 10.10%. The interpretation is that BABA’s business generates a higher return on investment than SBS’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. BABA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.46. Comparatively, SBS’s free cash flow per share was +1.42. On a percent-of-sales basis, BABA’s free cash flow was 2.95% while SBS converted 21.23% of its revenues into cash flow. This means that, for a given level of sales, SBS 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. BABA has a current ratio of 1.90 compared to 1.10 for SBS. This means that BABA can more easily cover its most immediate liabilities over the next twelve months. BABA’s debt-to-equity ratio is 0.34 versus a D/E of 0.69 for SBS. SBS is therefore the more solvent of the two companies, and has lower financial risk.Valuation
BABA trades at a forward P/E of 22.67, a P/B of 8.70, and a P/S of 12.80, compared to a forward P/E of 1.33, a P/B of 1.00, and a P/S of 1.42 for SBS. BABA 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. BABA is currently priced at a -9.93% to its one-year price target of 217.63. Comparatively, SBS is -34.96% relative to its price target of 11.47. This suggests that SBS is the better investment over the next year.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. BABA has a beta of 2.54 and SBS’s beta is 1.83. SBS’s shares are therefore the less volatile of the two stocks.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. BABA has a short ratio of 7.08 compared to a short interest of 1.02 for SBS. This implies that the market is currently less bearish on the outlook for SBS.Summary
Companhia de Saneamento Basico do Estado de Sao Paulo – SABESP (NYSE:SBS) beats Alibaba Group Holding Limited (NYSE:BABA) on a total of 9 of the 14 factors compared between the two stocks. SBS is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, SBS is the cheaper of the two stocks on an earnings, book value and sales basis, SBS is more undervalued relative to its price target. Finally, SBS has better sentiment signals based on short interest.