Altisource Residential Corporation (NYSE:RESI) and Dynex Capital, Inc. (NYSE:DX) are the two most active stocks in the REIT – Residential 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect RESI to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, DX is expected to grow at a -9.51% annual rate. All else equal, RESI’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 Return on Investment (ROI) as measures of profitability and return. RESI’s ROI is -10.20% while DX has a ROI of 1.30%. The interpretation is that DX’s business generates a higher return on investment than RESI’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. RESI’s free cash flow (“FCF”) per share for the trailing twelve months was -0.42. Comparatively, DX’s free cash flow per share was +0.91. On a percent-of-sales basis, RESI’s free cash flow was -0.04% while DX converted 0.05% of its revenues into cash flow. This means that, for a given level of sales, DX is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. RESI’s debt-to-equity ratio is 1.53 versus a D/E of 6.90 for DX. DX is therefore the more solvent of the two companies, and has lower financial risk.
RESI trades at a forward P/B of 0.90, and a P/S of 11.06, compared to a forward P/E of 9.81, a P/B of 0.95, and a P/S of 3.87 for DX. RESI 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. RESI is currently priced at a -18.42% to its one-year price target of $15.20. Comparatively, DX is -2.98% relative to its price target of $7.38. This suggests that RESI is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for RESI and 3.00 for DX, which implies that analysts are more bullish on the outlook for DX.
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. RESI has a beta of 2.07 and DX’s beta is 0.73. DX’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. RESI has a short ratio of 3.23 compared to a short interest of 1.43 for DX. This implies that the market is currently less bearish on the outlook for DX.
Dynex Capital, Inc. (NYSE:DX) beats Altisource Residential Corporation (NYSE:RESI) on a total of 6 of the 12 factors compared between the two stocks. DX is growing fastly, has higher cash flow per share and has a higher cash conversion rate. Finally, DX has better sentiment signals based on short interest.