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Waddell & Reed Financial, Inc. (WDR) vs. Enphase Energy, Inc. (ENPH): Which is the Better Investment?

Waddell & Reed Financial, Inc. (NYSE:WDR) shares are down more than -10.79% this year and recently decreased -3.39% or -$0.7 to settle at $19.93. Enphase Energy, Inc. (NASDAQ:ENPH), on the other hand, is up 63.49% year to date as of 04/13/2018. It currently trades at $3.94 and has returned -4.83% during the past week.

Waddell & Reed Financial, Inc. (NYSE:WDR) and Enphase Energy, Inc. (NASDAQ:ENPH) are the two most active stocks in the Asset Management 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

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect WDR to grow earnings at a 10.28% annual rate over the next 5 years.

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. Waddell & Reed Financial, Inc. (WDR) has an EBITDA margin of 24.43%. This suggests that WDR underlying business is more profitable WDR’s ROI is 13.70% while ENPH has a ROI of -12.50%. The interpretation is that WDR’s business generates a higher return on investment than ENPH’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. WDR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.10. Comparatively, ENPH’s free cash flow per share was -0.03. On a percent-of-sales basis, WDR’s free cash flow was 0.72% while ENPH converted -0% of its revenues into cash flow. This means that, for a given level of sales, WDR 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. WDR has a current ratio of 3.10 compared to 1.40 for ENPH. This means that WDR can more easily cover its most immediate liabilities over the next twelve months.

Valuation

WDR trades at a forward P/E of 9.16, a P/B of 1.90, and a P/S of 1.48, compared to a forward P/E of 17.06, and a P/S of 1.36 for ENPH. WDR is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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

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. WDR is currently priced at a -8.37% to its one-year price target of 21.75. Comparatively, ENPH is -1.5% relative to its price target of 4.00. This suggests that WDR is the better investment over the next year.

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. WDR has a beta of 1.94 and ENPH’s beta is 0.35. ENPH’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. WDR has a short ratio of 8.24 compared to a short interest of 5.59 for ENPH. This implies that the market is currently less bearish on the outlook for ENPH.

Summary

Waddell & Reed Financial, Inc. (NYSE:WDR) beats Enphase Energy, Inc. (NASDAQ:ENPH) on a total of 8 of the 14 factors compared between the two stocks. WDR is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. WDR is more undervalued relative to its price target. Finally, ROKU has better sentiment signals based on short interest.

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