Hovnanian Enterprises, Inc. (NYSE:HOV) shares are down more than -40.90% this year and recently decreased -1.49% or -$0.03 to settle at $1.98. Extra Space Storage Inc. (NYSE:EXR), on the other hand, is up 10.87% year to date as of 06/13/2018. It currently trades at $96.96 and has returned -0.54% during the past week.
Hovnanian Enterprises, Inc. (NYSE:HOV) and Extra Space Storage Inc. (NYSE:EXR) are the two most active stocks in the Residential Construction 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, EXR is expected to grow at a 6.00% annual rate. All else equal, EXR’s higher growth rate would imply a greater potential for capital appreciation.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. EBITDA margin of 68.65% for Extra Space Storage Inc. (EXR). HOV’s ROI is -16.80% while EXR has a ROI of 7.70%. The interpretation is that EXR’s business generates a higher return on investment than HOV’s.Cash Flow
Cash is king when it comes to investing. HOV’s free cash flow (“FCF”) per share for the trailing twelve months was +0.21. Comparatively, EXR’s free cash flow per share was +0.54. On a percent-of-sales basis, HOV’s free cash flow was 1.26% while EXR converted 6.16% of its revenues into cash flow. This means that, for a given level of sales, EXR is able to generate more free cash flow for investors.Valuation
HOV trades at a P/S of 0.13, compared to a forward P/E of 31.66, a P/B of 5.20, and a P/S of 10.79 for EXR. HOV is the cheaper 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. HOV is currently priced at a 13.14% to its one-year price target of 1.75. Comparatively, EXR is 2.06% relative to its price target of 95.00. This suggests that EXR 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. HOV has a beta of 1.58 and EXR’s beta is 0.24. EXR’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. HOV has a short ratio of 8.27 compared to a short interest of 13.31 for EXR. This implies that the market is currently less bearish on the outlook for HOV.Summary
Extra Space Storage Inc. (NYSE:EXR) beats Hovnanian Enterprises, Inc. (NYSE:HOV) on a total of 8 of the 14 factors compared between the two stocks. EXR higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, HOV is the cheaper of the two stocks on an earnings, book value and sales basis, EXR is more undervalued relative to its price target. Finally, GRA has better sentiment signals based on short interest.