GEO Group, Inc. (NYSE:GEO) shares are down more than -15.51% this year and recently decreased -1.24% or -$0.25 to settle at $19.94. CareTrust REIT, Inc. (NASDAQ:CTRE), on the other hand, is down -11.93% year to date as of 02/12/2018. It currently trades at $14.76 and has returned -2.51% during the past week.
GEO Group, Inc. (NYSE:GEO) and CareTrust REIT, Inc. (NASDAQ:CTRE) are the two most active stocks in the REIT – Healthcare Facilities 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect GEO to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, CTRE is expected to grow at a 30.30% annual rate. All else equal, CTRE’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. , compared to an EBITDA margin of 77.1% for CareTrust REIT, Inc. (CTRE).
The value of a stock is simply the present value of its future free cash flows. GEO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.71. Comparatively, CTRE’s free cash flow per share was +0.10. On a percent-of-sales basis, GEO’s free cash flow was -4.04% while CTRE converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, CTRE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. GEO has a current ratio of 1.20 compared to 0.90 for CTRE. This means that GEO can more easily cover its most immediate liabilities over the next twelve months. GEO’s debt-to-equity ratio is 2.16 versus a D/E of 0.81 for CTRE. GEO is therefore the more solvent of the two companies, and has lower financial risk.
GEO trades at a forward P/E of 13.22, a P/B of 1.98, and a P/S of 1.09, compared to a forward P/E of 19.29, a P/B of 1.84, and a P/S of 8.94 for CTRE. 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. GEO is currently priced at a -34.62% to its one-year price target of 30.50. Comparatively, CTRE is -24.31% relative to its price target of 19.50. This suggests that GEO 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 2.50 for GEO and 2.30 for CTRE, which implies that analysts are more bullish on the outlook for GEO.
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. GEO has a beta of 1.31 and CTRE’s beta is 0.72. CTRE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.GEO has a short ratio of 1.85 compared to a short interest of 5.47 for CTRE. This implies that the market is currently less bearish on the outlook for GEO.
CareTrust REIT, Inc. (NASDAQ:CTRE) beats GEO Group, Inc. (NYSE:GEO) on a total of 8 of the 14 factors compared between the two stocks. CTRE generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, DOC has better sentiment signals based on short interest.