J. C. Penney Company, Inc. (NYSE:JCP) shares are down more than -18.99% this year and recently increased 4.49% or $0.11 to settle at $2.56. TransCanada Corporation (NYSE:TRP), on the other hand, is down -7.94% year to date as of 07/19/2018. It currently trades at $44.78 and has returned 2.59% during the past week.
J. C. Penney Company, Inc. (NYSE:JCP) and TransCanada Corporation (NYSE:TRP) are the two most active stocks in the Department Stores 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
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, TRP is expected to grow at a 5.21% annual rate. All else equal, TRP’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 50.11% for TransCanada Corporation (TRP). JCP’s ROI is 2.40% while TRP has a ROI of 4.00%. The interpretation is that TRP’s business generates a higher return on investment than JCP’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. JCP’s free cash flow (“FCF”) per share for the trailing twelve months was -1.47. Comparatively, TRP’s free cash flow per share was -0.64. On a percent-of-sales basis, JCP’s free cash flow was -3.69% while TRP converted -5.5% of its revenues into cash flow. This means that, for a given level of sales, JCP is able to generate more free cash flow for investors.Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. JCP has a current ratio of 1.70 compared to 0.40 for TRP. This means that JCP can more easily cover its most immediate liabilities over the next twelve months. JCP’s debt-to-equity ratio is 3.35 versus a D/E of 2.04 for TRP. JCP is therefore the more solvent of the two companies, and has lower financial risk.Valuation
JCP trades at a forward P/E of 16.20, a P/B of 0.61, and a P/S of 0.06, compared to a forward P/E of 15.84, a P/B of 2.35, and a P/S of 3.87 for TRP. 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. JCP is currently priced at a -22.89% to its one-year price target of 3.32. Comparatively, TRP is -17.85% relative to its price target of 54.51. This suggests that JCP is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. JCP has a beta of 0.83 and TRP’s beta is 0.62. TRP’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. JCP has a short ratio of 8.40 compared to a short interest of 5.68 for TRP. This implies that the market is currently less bearish on the outlook for TRP.Summary
TransCanada Corporation (NYSE:TRP) beats J. C. Penney Company, Inc. (NYSE:JCP) on a total of 9 of the 14 factors compared between the two stocks. TRP has a higher cash conversion rate, is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. Finally, TRP has better sentiment signals based on short interest.