Sunstone Hotel Investors, Inc. (NYSE:SHO) shares are down more than -0.85% this year and recently decreased -1.50% or -$0.25 to settle at $16.39. W. R. Grace & Co. (NYSE:GRA), on the other hand, is up 4.22% year to date as of 06/13/2018. It currently trades at $73.09 and has returned -1.28% during the past week.
Sunstone Hotel Investors, Inc. (NYSE:SHO) and W. R. Grace & Co. (NYSE:GRA) are the two most active stocks in the REIT – Hotel/Motel industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.Growth
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect SHO to grow earnings at a 19.90% annual rate over the next 5 years. Comparatively, GRA is expected to grow at a 10.28% annual rate. All else equal, SHO’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. , compared to an EBITDA margin of 26.35% for W. R. Grace & Co. (GRA). SHO’s ROI is 4.50% while GRA has a ROI of 8.50%. The interpretation is that GRA’s business generates a higher return on investment than SHO’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. SHO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.64. Comparatively, GRA’s free cash flow per share was +0.34. On a percent-of-sales basis, SHO’s free cash flow was -12.1% while GRA converted 1.33% of its revenues into cash flow. This means that, for a given level of sales, GRA 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. SHO has a current ratio of 5.20 compared to 1.60 for GRA. This means that SHO can more easily cover its most immediate liabilities over the next twelve months. SHO’s debt-to-equity ratio is 0.43 versus a D/E of 6.47 for GRA. GRA is therefore the more solvent of the two companies, and has lower financial risk.Valuation
SHO trades at a forward P/E of 31.22, a P/B of 1.56, and a P/S of 3.16, compared to a forward P/E of 16.73, a P/B of 20.65, and a P/S of 2.81 for GRA. SHO is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. SHO is currently priced at a 0.86% to its one-year price target of 16.25. Comparatively, GRA is -9.93% relative to its price target of 81.15. This suggests that GRA is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. SHO has a beta of 1.14 and GRA’s beta is 1.18. SHO’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. SHO has a short ratio of 2.88 compared to a short interest of 2.70 for GRA. This implies that the market is currently less bearish on the outlook for GRA.Summary
W. R. Grace & Co. (NYSE:GRA) beats Sunstone Hotel Investors, Inc. (NYSE:SHO) on a total of 9 of the 14 factors compared between the two stocks. GRA is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, GRA is the cheaper of the two stocks on an earnings and sales basis, GRA is more undervalued relative to its price target. Finally, GRA has better sentiment signals based on short interest.