Ocwen Financial Corporation (NYSE:OCN) shares are up more than 14.06% this year and recently increased 5.62% or $0.19 to settle at $3.57. Arlington Asset Investment Corp. (NYSE:AI), on the other hand, is down -7.56% year to date as of 02/12/2018. It currently trades at $10.89 and has returned 6.76% during the past week.
Ocwen Financial Corporation (NYSE:OCN) and Arlington Asset Investment Corp. (NYSE:AI) are the two most active stocks in the Mortgage Investment industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 OCN to grow earnings at a 3.00% annual rate over the next 5 years. Comparatively, AI is expected to grow at a -10.10% annual rate. All else equal, OCN’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., compared to an EBITDA margin of -11670.85% for Arlington Asset Investment Corp. (AI). OCN’s ROI is 2.50% while AI has a ROI of -1.00%. The interpretation is that OCN’s business generates a higher return on investment than AI’s.
If there’s one thing investors care more about than earnings, it’s cash flow. OCN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.48. Comparatively, AI’s free cash flow per share was -. On a percent-of-sales basis, OCN’s free cash flow was 4.62% while AI converted 0% of its revenues into cash flow. This means that, for a given level of sales, OCN is able to generate more free cash flow for investors.
OCN’s debt-to-equity ratio is 11.61 versus a D/E of 9.77 for AI. OCN is therefore the more solvent of the two companies, and has lower financial risk.
OCN trades at a P/B of 0.78, and a P/S of 0.38, compared to a forward P/E of 5.35, a P/B of 0.74, and a P/S of 2.47 for AI. 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. OCN is currently priced at a 29.82% to its one-year price target of 2.75. Comparatively, AI is -14.86% relative to its price target of 12.79. This suggests that AI 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 OCN and 2.30 for AI, which implies that analysts are more bullish on the outlook for OCN.
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. OCN has a beta of 1.27 and AI’s beta is 0.67. AI’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.OCN has a short ratio of 6.24 compared to a short interest of 4.60 for AI. This implies that the market is currently less bearish on the outlook for AI.
Ocwen Financial Corporation (NYSE:OCN) beats Arlington Asset Investment Corp. (NYSE:AI) on a total of 8 of the 14 factors compared between the two stocks. OCN is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, OCN is the cheaper of the two stocks on an earnings and sales basis, Finally, RGC has better sentiment signals based on short interest.