Starwood Property Trust, Inc. (NYSE:STWD) shares are down more than -1.37% this year and recently increased 0.56% or $0.12 to settle at $21.65. National Retail Properties, Inc. (NYSE:NNN), on the other hand, is down -3.73% year to date as of 11/10/2017. It currently trades at $42.55 and has returned 3.63% during the past week.
Starwood Property Trust, Inc. (NYSE:STWD) and National Retail Properties, Inc. (NYSE:NNN) are the two most active stocks in the REIT – Diversified 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect STWD to grow earnings at a 3.77% annual rate over the next 5 years. Comparatively, NNN is expected to grow at a 6.00% annual rate. All else equal, NNN’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 89.67% for National Retail Properties, Inc. (NNN). STWD’s ROI is 1.10% while NNN has a ROI of 5.80%. The interpretation is that NNN’s business generates a higher return on investment than STWD’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, STWD’s free cash flow was 0% while NNN converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, STWD is able to generate more free cash flow for investors.
STWD’s debt-to-equity ratio is 1.70 versus a D/E of 0.86 for NNN. STWD is therefore the more solvent of the two companies, and has lower financial risk.
STWD trades at a forward P/E of 9.92, a P/B of 1.25, and a P/S of 6.99, compared to a forward P/E of 29.43, a P/B of 2.03, and a P/S of 11.18 for NNN. STWD 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 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. STWD is currently priced at a -9.26% to its one-year price target of 23.86. Comparatively, NNN is -6.73% relative to its price target of 45.62. This suggests that STWD 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 2.00 for STWD and 2.10 for NNN, which implies that analysts are more bullish on the outlook for NNN.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. STWD has a beta of 0.56 and NNN’s beta is 0.38. NNN’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.STWD has a short ratio of 8.40 compared to a short interest of 9.22 for NNN. This implies that the market is currently less bearish on the outlook for STWD.
Starwood Property Trust, Inc. (NYSE:STWD) beats National Retail Properties, Inc. (NYSE:NNN) on a total of 10 of the 14 factors compared between the two stocks. STWD is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, STWD is the cheaper of the two stocks on an earnings, book value and sales basis, STWD is more undervalued relative to its price target. Finally, STWD has better sentiment signals based on short interest.