Chesapeake Energy Corporation (NYSE:CHK) shares are down more than -29.29% this year and recently increased 2.19% or $0.06 to settle at $2.80. VEREIT, Inc. (NYSE:VER), on the other hand, is down -11.04% year to date as of 02/14/2018. It currently trades at $6.93 and has returned 0.29% during the past week.
Chesapeake Energy Corporation (NYSE:CHK) and VEREIT, Inc. (NYSE:VER) are the two most active stocks in the market 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.
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 CHK to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, VER is expected to grow at a 5.00% annual rate. All else equal, All else equal, the two stocks’ identical expected growth rates would imply a similar potential for capital appreciation..
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 EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 28.79% for VEREIT, Inc. (VER). CHK’s ROI is -56.90% while VER has a ROI of 0.40%. The interpretation is that VER’s business generates a higher return on investment than CHK’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. CHK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, VER’s free cash flow per share was +0.05. On a percent-of-sales basis, CHK’s free cash flow was 3% while VER converted 3.36% of its revenues into cash flow. This means that, for a given level of sales, VER is able to generate more free cash flow for investors.
CHK trades at a forward P/E of 3.37, and a P/S of 0.28, compared to a P/B of 0.84, and a P/S of 4.93 for VER. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CHK is currently priced at a -37.22% to its one-year price target of 4.46. Comparatively, VER is -23.51% relative to its price target of 9.06. This suggests that CHK 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 3.10 for CHK and 2.50 for VER, which implies that analysts are more bullish on the outlook for CHK.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. CHK has a beta of 1.84 and VER’s beta is 0.65. VER’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. CHK has a short ratio of 4.93 compared to a short interest of 2.26 for VER. This implies that the market is currently less bearish on the outlook for VER.
VEREIT, Inc. (NYSE:VER) beats Chesapeake Energy Corporation (NYSE:CHK) on a total of 7 of the 14 factors compared between the two stocks. VER has higher cash flow per share, generates a higher return on investment and has a higher cash conversion rate. Finally, VER has better sentiment signals based on short interest.