Best Buy Co., Inc. (NYSE:BBY) shares are up more than 12.33% this year and recently increased 0.69% or $0.53 to settle at $76.91. McDonald’s Corporation (NYSE:MCD), on the other hand, is down -6.04% year to date as of 08/16/2018. It currently trades at $161.73 and has returned 1.53% during the past week.
Best Buy Co., Inc. (NYSE:BBY) and McDonald’s Corporation (NYSE:MCD) are the two most active stocks in the Electronics 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. Analysts expect BBY to grow earnings at a 13.70% annual rate over the next 5 years. Comparatively, MCD is expected to grow at a 8.55% annual rate. All else equal, BBY’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 49.34% for McDonald’s Corporation (MCD). BBY’s ROI is 26.30% while MCD has a ROI of 26.20%. The interpretation is that BBY’s business generates a higher return on investment than MCD’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. BBY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.36. Comparatively, MCD’s free cash flow per share was -0.07. On a percent-of-sales basis, BBY’s free cash flow was -0.24% while MCD converted -0.24% of its revenues into cash flow. This means that, for a given level of sales, BBY is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. BBY has a current ratio of 1.30 compared to 1.50 for MCD. This means that MCD can more easily cover its most immediate liabilities over the next twelve months.Valuation
BBY trades at a forward P/E of 14.28, a P/B of 6.36, and a P/S of 0.49, compared to a forward P/E of 19.71, and a P/S of 5.89 for MCD. 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. BBY is currently priced at a 1.48% to its one-year price target of 75.79. Comparatively, MCD is -11.92% relative to its price target of 183.62. This suggests that MCD 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. BBY has a beta of 0.98 and MCD’s beta is 0.65. MCD’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. BBY has a short ratio of 5.80 compared to a short interest of 1.79 for MCD. This implies that the market is currently less bearish on the outlook for MCD.Summary
McDonald’s Corporation (NYSE:MCD) beats Best Buy Co., Inc. (NYSE:BBY) on a total of 9 of the 14 factors compared between the two stocks. MCD is growing fastly, has higher cash flow per share, higher liquidity and has lower financial risk. MCD is more undervalued relative to its price target. Finally, MCD has better sentiment signals based on short interest.