DiamondRock Hospitality Company (NYSE:DRH) shares are up more than 9.57% this year and recently increased 3.78% or $0.45 to settle at $12.37. Sanchez Energy Corporation (NYSE:SN), on the other hand, is down -22.79% year to date as of 05/21/2018. It currently trades at $4.10 and has returned 5.40% during the past week.
DiamondRock Hospitality Company (NYSE:DRH) and Sanchez Energy Corporation (NYSE:SN) are the two most active stocks in the REIT – Hotel/Motel 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
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect DRH to grow earnings at a -9.50% annual rate over the next 5 years.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., compared to an EBITDA margin of 34.36% for Sanchez Energy Corporation (SN). DRH’s ROI is 4.50% while SN has a ROI of -8.90%. The interpretation is that DRH’s business generates a higher return on investment than SN’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. DRH’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, SN’s free cash flow per share was -0.77. On a percent-of-sales basis, DRH’s free cash flow was -0% while SN converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, DRH is able to generate more free cash flow for investors.Valuation
DRH trades at a forward P/E of 24.25, a P/B of 1.37, and a P/S of 2.91, compared to a forward P/E of 4.54, and a P/S of 0.42 for SN. DRH 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. DRH is currently priced at a 8.22% to its one-year price target of 11.43. Comparatively, SN is -16.33% relative to its price target of 4.90. This suggests that SN 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. DRH has a beta of 1.40 and SN’s beta is 1.84. DRH’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. DRH has a short ratio of 4.30 compared to a short interest of 7.08 for SN. This implies that the market is currently less bearish on the outlook for DRH.Summary
Sanchez Energy Corporation (NYSE:SN) beats DiamondRock Hospitality Company (NYSE:DRH) on a total of 8 of the 14 factors compared between the two stocks. SN generates a higher return on investment, is more profitable, higher liquidity and has lower financial risk. In terms of valuation, SN is the cheaper of the two stocks on an earnings, book value and sales basis, SN is more undervalued relative to its price target. Finally, MU has better sentiment signals based on short interest.