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Should You Buy Alkermes plc (ALKS) or LGI Homes, Inc. (LGIH)?

Alkermes plc (NASDAQ:ALKS) shares are down more than -12.88% this year and recently increased 3.11% or $1.44 to settle at $47.68. LGI Homes, Inc. (NASDAQ:LGIH), on the other hand, is down -20.03% year to date as of 05/16/2018. It currently trades at $60.00 and has returned -5.00% during the past week.

Alkermes plc (NASDAQ:ALKS) and LGI Homes, Inc. (NASDAQ:LGIH) are the two most active stocks in the Biotechnology industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, LGIH is expected to grow at a 21.80% annual rate. All else equal, LGIH’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 13.58% for LGI Homes, Inc. (LGIH). ALKS’s ROI is -10.10% while LGIH has a ROI of 11.70%. The interpretation is that LGIH’s business generates a higher return on investment than ALKS’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. ALKS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.29. Comparatively, LGIH’s free cash flow per share was -4.48. On a percent-of-sales basis, ALKS’s free cash flow was -0% while LGIH converted -8.05% of its revenues into cash flow. This means that, for a given level of sales, ALKS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

ALKS’s debt-to-equity ratio is 0.24 versus a D/E of 1.10 for LGIH. LGIH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ALKS trades at a forward P/E of 77.40, a P/B of 6.37, and a P/S of 7.86, compared to a forward P/E of 7.98, a P/B of 2.57, and a P/S of 0.99 for LGIH. ALKS is the expensive 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

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. ALKS is currently priced at a -12.43% to its one-year price target of 54.45. Comparatively, LGIH is -21.67% relative to its price target of 76.60. This suggests that LGIH is the better investment over the next year.

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. ALKS has a beta of 1.81 and LGIH’s beta is 0.06. LGIH’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. ALKS has a short ratio of 7.37 compared to a short interest of 8.12 for LGIH. This implies that the market is currently less bearish on the outlook for ALKS.

Summary




LGI Homes, Inc. (NASDAQ:LGIH) beats Alkermes plc (NASDAQ:ALKS) on a total of 8 of the 14 factors compared between the two stocks. LGIH has higher cash flow per share, is more profitable and generates a higher return on investment. In terms of valuation, LGIH is the cheaper of the two stocks on an earnings, book value and sales basis, LGIH is more undervalued relative to its price target.

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