Eldorado Gold Corporation (NYSE:EGO) shares are down more than -18.88% this year and recently increased 2.65% or $0.03 to settle at $1.16. Cabot Oil & Gas Corporation (NYSE:COG), on the other hand, is down -16.08% year to date as of 02/14/2018. It currently trades at $24.00 and has returned 2.70% during the past week.
Eldorado Gold Corporation (NYSE:EGO) and Cabot Oil & Gas Corporation (NYSE:COG) 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 EGO to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, COG is expected to grow at a 36.45% annual rate. All else equal, COG’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. EBITDA margin of 25.04% for Cabot Oil & Gas Corporation (COG). EGO’s ROI is 0.30% while COG has a ROI of -8.00%. The interpretation is that EGO’s business generates a higher return on investment than COG’s.
The value of a stock is simply the present value of its future free cash flows. EGO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, COG’s free cash flow per share was -0.06. On a percent-of-sales basis, EGO’s free cash flow was -0.03% while COG converted -2.4% of its revenues into cash flow. This means that, for a given level of sales, EGO is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. EGO has a current ratio of 7.80 compared to 1.60 for COG. This means that EGO can more easily cover its most immediate liabilities over the next twelve months. EGO’s debt-to-equity ratio is 0.00 versus a D/E of 0.58 for COG. COG is therefore the more solvent of the two companies, and has lower financial risk.
EGO trades at a forward P/E of 21.48, a P/B of 0.25, and a P/S of 2.47, compared to a forward P/E of 23.62, a P/B of 4.20, and a P/S of 6.61 for COG. EGO is the cheaper 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. EGO is currently priced at a -41.41% to its one-year price target of 1.98. Comparatively, COG is -25.23% relative to its price target of 32.10. This suggests that EGO 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 EGO and 2.20 for COG, which implies that analysts are more bullish on the outlook for EGO.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. EGO has a beta of 1.01 and COG’s beta is 0.55. COG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. EGO has a short ratio of 3.32 compared to a short interest of 2.89 for COG. This implies that the market is currently less bearish on the outlook for COG.
Eldorado Gold Corporation (NYSE:EGO) beats Cabot Oil & Gas Corporation (NYSE:COG) on a total of 8 of the 14 factors compared between the two stocks. EGO generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, EGO is the cheaper of the two stocks on an earnings, book value and sales basis, EGO is more undervalued relative to its price target. Finally, ZN has better sentiment signals based on short interest.