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Choosing Between GameStop Corp. (GME) and Trevena, Inc. (TRVN)

GameStop Corp. (NYSE:GME) shares are down more than -18.11% this year and recently decreased -1.08% or -$0.16 to settle at $14.70. Trevena, Inc. (NASDAQ:TRVN), on the other hand, is down -6.25% year to date as of 07/11/2018. It currently trades at $1.50 and has returned -2.60% during the past week.

GameStop Corp. (NYSE:GME) and Trevena, Inc. (NASDAQ:TRVN) are the two most active stocks in the Electronics Stores 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.

Growth

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 GME to grow earnings at a 15.00% annual rate over the next 5 years.

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. GameStop Corp. (GME) has an EBITDA margin of 2.65%. This suggests that GME underlying business is more profitable

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. GME’s free cash flow (“FCF”) per share for the trailing twelve months was -5.79. Comparatively, TRVN’s free cash flow per share was -0.16.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. GME has a current ratio of 1.50 compared to 4.10 for TRVN. This means that TRVN can more easily cover its most immediate liabilities over the next twelve months. GME’s debt-to-equity ratio is 0.37 versus a D/E of 0.69 for TRVN. TRVN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GME trades at a forward P/E of 5.15, a P/B of 0.69, and a P/S of 0.16, compared to a P/B of 2.68, for TRVN. GME 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

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. GME is currently priced at a 3.52% to its one-year price target of 14.20. Comparatively, TRVN is -81.41% relative to its price target of 8.07. This suggests that TRVN is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. GME has a beta of 1.30 and TRVN’s beta is -0.55. TRVN’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. GME has a short ratio of 8.39 compared to a short interest of 7.58 for TRVN. This implies that the market is currently less bearish on the outlook for TRVN.

Summary

Trevena, Inc. (NASDAQ:TRVN) beats GameStop Corp. (NYSE:GME) on a total of 8 of the 13 factors compared between the two stocks. TRVN is growing fastly and higher liquidity. In terms of valuation, TRVN is the cheaper of the two stocks on an earnings and sales basis, TRVN is more undervalued relative to its price target. Finally, TRVN has better sentiment signals based on short interest.

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