Orchid Island Capital, Inc. (NYSE:ORC) shares are down more than -15.19% this year and recently decreased -2.11% or -$0.17 to settle at $7.87. Preferred Apartment Communities, Inc. (NYSE:APTS), on the other hand, is down -13.68% year to date as of 01/12/2018. It currently trades at $17.48 and has returned -8.00% during the past week.
Orchid Island Capital, Inc. (NYSE:ORC) and Preferred Apartment Communities, Inc. (NYSE:APTS) 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.
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. Comparatively, APTS is expected to grow at a 7.00% annual rate. All else equal, APTS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. EBITDA margin of 285.93% for Preferred Apartment Communities, Inc. (APTS). ORC’s ROI is 0.10% while APTS has a ROI of 1.30%. The interpretation is that APTS’s business generates a higher return on investment than ORC’s.
Cash is king when it comes to investing. On a percent-of-sales basis, ORC’s free cash flow was 0% while APTS converted 0% of its revenues into cash flow. This means that, for a given level of sales, ORC is able to generate more free cash flow for investors.
ORC’s debt-to-equity ratio is 8.95 versus a D/E of 1.41 for APTS. ORC is therefore the more solvent of the two companies, and has lower financial risk.
ORC trades at a forward P/E of 5.08, a P/B of 0.86, and a P/S of 11.61, compared to a P/B of 0.50, and a P/S of 2.09 for APTS. ORC 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. ORC is currently priced at a -21.3% to its one-year price target of 10.00. Comparatively, APTS is -18.32% relative to its price target of 21.40. This suggests that ORC 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 1.00 for ORC and 1.60 for APTS, which implies that analysts are more bullish on the outlook for APTS.
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. ORC has a beta of 0.50 and APTS’s beta is 0.43. APTS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. ORC has a short ratio of 4.97 compared to a short interest of 3.58 for APTS. This implies that the market is currently less bearish on the outlook for APTS.
Preferred Apartment Communities, Inc. (NYSE:APTS) beats Orchid Island Capital, Inc. (NYSE:ORC) on a total of 10 of the 14 factors compared between the two stocks. APTS higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. In terms of valuation, APTS is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, APTS has better sentiment signals based on short interest.