CME Group Inc. (NASDAQ:CME) and E*TRADE Financial Corporation (NASDAQ:ETFC) are the two most active stocks in the Investment Brokerage – National industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

**Growth**

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CME to grow earnings at a 8.90% annual rate over the next 5 years. Comparatively, ETFC is expected to grow at a 14.70% annual rate. All else equal, ETFC’s higher growth rate would imply a greater potential for capital appreciation.

**Profitability and Returns**

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. CME Group Inc. (CME) has an EBITDA margin of 73.24%, compared to an EBITDA margin of 50.07% for E*TRADE Financial Corporation (ETFC). This suggests that CME underlying business is more profitable. CME’s ROI is 6.40% while ETFC has a ROI of 1.40%. The interpretation is that CME’s business generates a higher return on investment than ETFC’s.

**Cash Flow **

Earnings don’t always accurately reflect the amount of cash that a company brings in. CME’s free cash flow (“FCF”) per share for the trailing twelve months was +0.19. Comparatively, ETFC’s free cash flow per share was -4.37. On a percent-of-sales basis, CME’s free cash flow was 1.8% while ETFC converted -59.21% of its revenues into cash flow. This means that, for a given level of sales, CME is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CME’s debt-to-equity ratio is 0.11 versus a D/E of 6.69 for ETFC. ETFC is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

CME trades at a forward P/E of 24.20, a P/B of 2.09, and a P/S of 12.12, compared to a forward P/E of 16.19, a P/B of 1.76, and a P/S of 5.17 for ETFC. CME 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CME is currently priced at a -3.38% to its one-year price target of $132.91. Comparatively, ETFC is -11.55% relative to its price target of $45.36. This suggests that ETFC 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 2.10 for CME and 2.30 for ETFC, which implies that analysts are more bullish on the outlook for ETFC.

**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. CME has a beta of 0.72 and ETFC’s beta is 1.46. CME’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. CME has a short ratio of 3.82 compared to a short interest of 1.95 for ETFC. This implies that the market is currently less bearish on the outlook for ETFC.

**Summary**

CME Group Inc. (NASDAQ:CME) beats E*TRADE Financial Corporation (NASDAQ:ETFC) on a total of 7 of the 13 factors compared between the two stocks. CME 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, Z has better sentiment signals based on short interest.