Organovo Holdings, Inc. (NASDAQ:ONVO) shares are down more than -56.05% this year and recently decreased -3.87% or -$0.06 to settle at $1.49. Foundation Medicine, Inc. (NASDAQ:FMI), on the other hand, is up 232.77% year to date as of 12/04/2017. It currently trades at $58.90 and has returned 15.94% during the past week.
Organovo Holdings, Inc. (NASDAQ:ONVO) and Foundation Medicine, Inc. (NASDAQ:FMI) are the two most active stocks in the Medical Laboratories & Research 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
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. ONVO’s ROI is -61.90% while FMI has a ROI of -69.10%. The interpretation is that ONVO’s business generates a higher return on investment than FMI’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. ONVO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.06. Comparatively, FMI’s free cash flow per share was -0.70. On a percent-of-sales basis, ONVO’s free cash flow was -0.15% while FMI converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, FMI 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. ONVO has a current ratio of 12.90 compared to 2.20 for FMI. This means that ONVO can more easily cover its most immediate liabilities over the next twelve months. ONVO’s debt-to-equity ratio is 0.00 versus a D/E of 0.00 for FMI. ONVO is therefore the more solvent of the two companies, and has lower financial risk.
ONVO trades at a P/B of 3.04, and a P/S of 39.74, compared to a P/B of 33.47, and a P/S of 15.28 for FMI. ONVO is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S 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 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. ONVO is currently priced at a -40.4% to its one-year price target of 2.50. Comparatively, FMI is 44.82% relative to its price target of 40.67. This suggests that ONVO 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 1.70 for ONVO and 2.60 for FMI, which implies that analysts are more bullish on the outlook for FMI.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ONVO has a beta of 3.10 and FMI’s beta is -0.04. FMI’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. ONVO has a short ratio of 13.48 compared to a short interest of 14.55 for FMI. This implies that the market is currently less bearish on the outlook for ONVO.
Organovo Holdings, Inc. (NASDAQ:ONVO) beats Foundation Medicine, Inc. (NASDAQ:FMI) on a total of 7 of the 14 factors compared between the two stocks. ONVO generates a higher return on investment, has higher cash flow per share and higher liquidity. ONVO is more undervalued relative to its price target. Finally, ONVO has better sentiment signals based on short interest.