Real Goods Solar, Inc. (NASDAQ:RGSE) shares are down more than -73.78% this year and recently increased 2.73% or $0.01 to settle at $0.39. Ocwen Financial Corporation (NYSE:OCN), on the other hand, is up 30.03% year to date as of 09/11/2018. It currently trades at $4.07 and has returned -2.16% during the past week.
Real Goods Solar, Inc. (NASDAQ:RGSE) and Ocwen Financial Corporation (NYSE:OCN) are the two most active stocks in the General Building Materials industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Comparatively, OCN is expected to grow at a 3.00% annual rate. All else equal, OCN’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 25.35% for Ocwen Financial Corporation (OCN).Cash Flow
The value of a stock is simply the present value of its future free cash flows. RGSE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.31. Comparatively, OCN’s free cash flow per share was +0.34. On a percent-of-sales basis, RGSE’s free cash flow was -0.09% while OCN converted 3.81% of its revenues into cash flow. This means that, for a given level of sales, OCN is able to generate more free cash flow for investors.Valuation
RGSE trades at a P/S of 1.19, compared to a P/B of 0.91, and a P/S of 0.50 for OCN. RGSE 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. RGSE is currently priced at a -80.5% to its one-year price target of 2.00. Comparatively, OCN is -9.56% relative to its price target of 4.50. This suggests that RGSE 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. RGSE has a beta of 1.68 and OCN’s beta is 1.12. OCN’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. RGSE has a short ratio of 1.03 compared to a short interest of 8.50 for OCN. This implies that the market is currently less bearish on the outlook for RGSE.Summary
Ocwen Financial Corporation (NYSE:OCN) beats Real Goods Solar, Inc. (NASDAQ:RGSE) on a total of 7 of the 14 factors compared between the two stocks. OCN higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, LTS has better sentiment signals based on short interest.