HCP, Inc. (NYSE:HCP) shares are down more than -9.69% this year and recently decreased -1.11% or -$0.3 to settle at $26.84. Sabra Health Care REIT, Inc. (NASDAQ:SBRA), on the other hand, is down -20.64% year to date as of 11/06/2017. It currently trades at $19.38 and has returned -5.37% during the past week.
HCP, Inc. (NYSE:HCP) and Sabra Health Care REIT, Inc. (NASDAQ:SBRA) are the two most active stocks in the REIT – Healthcare Facilities 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect HCP to grow earnings at a 2.50% annual rate over the next 5 years. Comparatively, SBRA is expected to grow at a 6.00% annual rate. All else equal, SBRA’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 77.99% for Sabra Health Care REIT, Inc. (SBRA).
The value of a stock is simply the present value of its future free cash flows. HCP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.02. Comparatively, SBRA’s free cash flow per share was -0.23. On a percent-of-sales basis, HCP’s free cash flow was 0.44% while SBRA converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, HCP is able to generate more free cash flow for investors.
HCP’s debt-to-equity ratio is 1.35 versus a D/E of 0.89 for SBRA. HCP is therefore the more solvent of the two companies, and has lower financial risk.
HCP trades at a forward P/E of 36.22, a P/B of 2.28, and a P/S of 7.98, compared to a forward P/E of 11.39, a P/B of 0.65, and a P/S of 11.65 for SBRA. HCP is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. 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. HCP is currently priced at a -8.46% to its one-year price target of 29.32. Comparatively, SBRA is -22.01% relative to its price target of 24.85. This suggests that SBRA 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 3.00 for HCP and 2.70 for SBRA, which implies that analysts are more bullish on the outlook for HCP.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. HCP has a beta of 0.34 and SBRA’s beta is 0.94. HCP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. HCP has a short ratio of 2.90 compared to a short interest of 2.81 for SBRA. This implies that the market is currently less bearish on the outlook for SBRA.
Sabra Health Care REIT, Inc. (NASDAQ:SBRA) beats HCP, Inc. (NYSE:HCP) on a total of 8 of the 14 factors compared between the two stocks. SBRA generates a higher return on investment, is more profitable and has lower financial risk. In terms of valuation, SBRA is the cheaper of the two stocks on an earnings and book value, SBRA is more undervalued relative to its price target. Finally, SBRA has better sentiment signals based on short interest.