American Homes 4 Rent (NYSE:AMH) shares are down more than -5.04% this year and recently decreased -0.77% or -$0.16 to settle at $20.74. Two Harbors Investment Corp. (NYSE:TWO), on the other hand, is down -3.38% year to date as of 01/08/2018. It currently trades at $15.71 and has returned -2.36% during the past week.
American Homes 4 Rent (NYSE:AMH) and Two Harbors Investment Corp. (NYSE:TWO) are the two most active stocks in the REIT – Residential 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AMH to grow earnings at a 14.40% annual rate over the next 5 years. Comparatively, TWO is expected to grow at a -1.02% annual rate. All else equal, AMH’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 Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. AMH’s ROI is -0.10% while TWO has a ROI of 1.80%. The interpretation is that TWO’s business generates a higher return on investment than AMH’s.
If there’s one thing investors care more about than earnings, it’s cash flow. AMH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.25. Comparatively, TWO’s free cash flow per share was +0.25. On a percent-of-sales basis, AMH’s free cash flow was 0.01% while TWO converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, AMH is able to generate more free cash flow for investors.
AMH’s debt-to-equity ratio is 0.46 versus a D/E of 6.64 for TWO. TWO is therefore the more solvent of the two companies, and has lower financial risk.
AMH trades at a forward P/E of 90.17, a P/B of 1.08, and a P/S of 6.35, compared to a forward P/E of 8.62, a P/B of 0.78, and a P/S of 4.43 for TWO. AMH 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. AMH is currently priced at a -17.86% to its one-year price target of 25.25. Comparatively, TWO is -7.59% relative to its price target of 17.00. This suggests that AMH 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 1.90 for AMH and 1.90 for TWO, which implies that analysts are equally bullish on their outlook for the two stocks.
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. AMH has a beta of 0.68 and TWO’s beta is 0.57. TWO’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. AMH has a short ratio of 3.16 compared to a short interest of 3.31 for TWO. This implies that the market is currently less bearish on the outlook for AMH.
Two Harbors Investment Corp. (NYSE:TWO) beats American Homes 4 Rent (NYSE:AMH) on a total of 5 of the 14 factors compared between the two stocks. TWO is growing fastly. In terms of valuation, TWO is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, REG has better sentiment signals based on short interest.