HCP, Inc. (NYSE:HCP) shares are down more than -9.82% this year and recently decreased -3.09% or -$0.75 to settle at $23.52. Sally Beauty Holdings, Inc. (NYSE:SBH), on the other hand, is down -16.31% year to date as of 06/13/2018. It currently trades at $15.70 and has returned 3.22% during the past week.
HCP, Inc. (NYSE:HCP) and Sally Beauty Holdings, Inc. (NYSE:SBH) are the two most active stocks in the REIT – Healthcare Facilities industry 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.Growth
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect HCP to grow earnings at a 2.50% annual rate over the next 5 years. Comparatively, SBH is expected to grow at a 8.78% annual rate. All else equal, SBH’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 14.67% for Sally Beauty Holdings, Inc. (SBH). HCP’s ROI is 2.60% while SBH has a ROI of 23.10%. The interpretation is that SBH’s business generates a higher return on investment than HCP’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. HCP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.02. Comparatively, SBH’s free cash flow per share was +0.47. On a percent-of-sales basis, HCP’s free cash flow was 0.51% while SBH converted 1.46% of its revenues into cash flow. This means that, for a given level of sales, SBH is able to generate more free cash flow for investors.Valuation
HCP trades at a forward P/E of 43.56, a P/B of 2.12, and a P/S of 6.02, compared to a forward P/E of 6.69, and a P/S of 0.49 for SBH. HCP 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. HCP is currently priced at a -6.67% to its one-year price target of 25.20. Comparatively, SBH is -12.04% relative to its price target of 17.85. This suggests that SBH is the better investment over the next year.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. HCP has a beta of 0.27 and SBH’s beta is 0.32. HCP’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. HCP has a short ratio of 2.92 compared to a short interest of 15.15 for SBH. This implies that the market is currently less bearish on the outlook for HCP.Summary
Sally Beauty Holdings, Inc. (NYSE:SBH) beats HCP, Inc. (NYSE:HCP) on a total of 10 of the 14 factors compared between the two stocks. SBH 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, SBH is the cheaper of the two stocks on an earnings, book value and sales basis, SBH is more undervalued relative to its price target. Finally, DPW has better sentiment signals based on short interest.