Annaly Capital Management, Inc. (NYSE:NLY) shares are down more than -13.46% this year and recently increased 0.29% or $0.03 to settle at $10.29. Cabot Oil & Gas Corporation (NYSE:COG), on the other hand, is down -18.36% year to date as of 05/17/2018. It currently trades at $23.35 and has returned 1.70% during the past week.
Annaly Capital Management, Inc. (NYSE:NLY) and Cabot Oil & Gas Corporation (NYSE:COG) are the two most active stocks in the REIT – Diversified 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
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 NLY to grow earnings at a -2.02% annual rate over the next 5 years. Comparatively, COG is expected to grow at a 46.82% annual rate. All else equal, COG’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 EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 21.03% for Cabot Oil & Gas Corporation (COG). NLY’s ROI is 1.60% while COG has a ROI of -1.60%. The interpretation is that NLY’s business generates a higher return on investment than COG’s.Cash Flow
Cash is king when it comes to investing. On a percent-of-sales basis, NLY’s free cash flow was 0% while COG converted 4.86% of its revenues into cash flow. This means that, for a given level of sales, COG is able to generate more free cash flow for investors.Liquidity and Financial Risk
NLY’s debt-to-equity ratio is 6.96 versus a D/E of 0.63 for COG. NLY is therefore the more solvent of the two companies, and has lower financial risk.
NLY trades at a forward P/E of 9.15, a P/B of 0.98, and a P/S of 3.08, compared to a forward P/E of 14.61, a P/B of 4.46, and a P/S of 6.25 for COG. NLY 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. NLY is currently priced at a -4.63% to its one-year price target of 10.79. Comparatively, COG is -21.75% relative to its price target of 29.84. This suggests that COG 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. NLY has a beta of 0.14 and COG’s beta is 0.38. NLY’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. NLY has a short ratio of 3.45 compared to a short interest of 4.17 for COG. This implies that the market is currently less bearish on the outlook for NLY.Summary
Cabot Oil & Gas Corporation (NYSE:COG) beats Annaly Capital Management, Inc. (NYSE:NLY) on a total of 7 of the 14 factors compared between the two stocks. COG is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, NLY is the cheaper of the two stocks on an earnings, book value and sales basis, COG is more undervalued relative to its price target. Finally, FB has better sentiment signals based on short interest.