KB Home (NYSE:KBH) shares are down more than -24.16% this year and recently increased 0.33% or $0.08 to settle at $24.23. Newfield Exploration Company (NYSE:NFX), on the other hand, is down -12.75% year to date as of 08/09/2018. It currently trades at $27.51 and has returned -1.61% during the past week.
KB Home (NYSE:KBH) and Newfield Exploration Company (NYSE:NFX) are the two most active stocks in the Residential Construction 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
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect KBH to grow earnings at a 21.42% annual rate over the next 5 years. Comparatively, NFX is expected to grow at a 30.12% annual rate. All else equal, NFX’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 45.85% for Newfield Exploration Company (NFX). KBH’s ROI is 4.30% while NFX has a ROI of 13.40%. The interpretation is that NFX’s business generates a higher return on investment than KBH’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. KBH’s free cash flow (“FCF”) per share for the trailing twelve months was +1.17. Comparatively, NFX’s free cash flow per share was +0.38. On a percent-of-sales basis, KBH’s free cash flow was 2.35% while NFX converted 4.3% of its revenues into cash flow. This means that, for a given level of sales, NFX is able to generate more free cash flow for investors.Liquidity and Financial Risk
KBH’s debt-to-equity ratio is 1.23 versus a D/E of 1.48 for NFX. NFX is therefore the more solvent of the two companies, and has lower financial risk.
KBH trades at a forward P/E of 7.65, a P/B of 1.11, and a P/S of 0.48, compared to a forward P/E of 6.48, a P/B of 3.35, and a P/S of 2.60 for NFX. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. KBH is currently priced at a -20.11% to its one-year price target of 30.33. Comparatively, NFX is -27.24% relative to its price target of 37.81. This suggests that NFX 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. KBH has a beta of 1.37 and NFX’s beta is 1.50. KBH’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. KBH has a short ratio of 2.72 compared to a short interest of 2.71 for NFX. This implies that the market is currently less bearish on the outlook for NFX.Summary
Newfield Exploration Company (NYSE:NFX) beats KB Home (NYSE:KBH) on a total of 9 of the 14 factors compared between the two stocks. NFX has higher cash flow per share, is more profitable, generates a higher return on investment, has a higher cash conversion rate and higher liquidity. NFX is more undervalued relative to its price target. Finally, NFX has better sentiment signals based on short interest.