Chico’s FAS, Inc. (NYSE:CHS) shares are up more than 18.03% this year and recently decreased -3.79% or -$0.41 to settle at $10.41. Capstone Turbine Corporation (NASDAQ:CPST), on the other hand, is up 127.27% year to date as of 04/13/2018. It currently trades at $1.75 and has returned 21.53% during the past week.
Chico’s FAS, Inc. (NYSE:CHS) and Capstone Turbine Corporation (NASDAQ:CPST) are the two most active stocks in the Apparel Stores 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.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CHS to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, CPST is expected to grow at a 15.00% 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
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. Chico’s FAS, Inc. (CHS) has an EBITDA margin of 10.58%. This suggests that CHS underlying business is more profitable CHS’s ROI is 12.80% while CPST has a ROI of -70.20%. The interpretation is that CHS’s business generates a higher return on investment than CPST’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. CHS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.32. Comparatively, CPST’s free cash flow per share was -0.09. On a percent-of-sales basis, CHS’s free cash flow was 1.79% while CPST converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, CHS is able to generate more free cash flow for investors.Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. CHS has a current ratio of 1.90 compared to 1.50 for CPST. This means that CHS can more easily cover its most immediate liabilities over the next twelve months. CHS’s debt-to-equity ratio is 0.10 versus a D/E of 0.51 for CPST. CPST is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CHS trades at a forward P/E of 11.39, a P/B of 1.98, and a P/S of 0.60, compared to a P/B of 3.65, and a P/S of 1.16 for CPST. 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. CHS is currently priced at a -4.93% to its one-year price target of 10.95. Comparatively, CPST is 0% relative to its price target of 1.75. This suggests that CHS is the better investment over the next year.
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. CHS has a beta of 0.78 and CPST’s beta is 0.29. CPST’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. CHS has a short ratio of 3.51 compared to a short interest of 3.76 for CPST. This implies that the market is currently less bearish on the outlook for CHS.Summary
Chico’s FAS, Inc. (NYSE:CHS) beats Capstone Turbine Corporation (NASDAQ:CPST) on a total of 10 of the 14 factors compared between the two stocks. CHS is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, CHS is the cheaper of the two stocks on book value and sales basis, CHS is more undervalued relative to its price target. Finally, CHS has better sentiment signals based on short interest.