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Critical Comparison: Invesco Mortgage Capital Inc. (IVR) vs. Northern Dynasty Minerals Ltd. (NAK)

Invesco Mortgage Capital Inc. (NYSE:IVR) shares are down more than -17.22% this year and recently decreased -1.60% or -$0.24 to settle at $14.76. Northern Dynasty Minerals Ltd. (NYSE:NAK), on the other hand, is down -71.19% year to date as of 10/11/2018. It currently trades at $0.51 and has returned -8.16% during the past week.

Invesco Mortgage Capital Inc. (NYSE:IVR) and Northern Dynasty Minerals Ltd. (NYSE:NAK) are the two most active stocks in the REIT – Diversified 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

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect IVR to grow earnings at a -2.76% annual rate over the next 5 years.

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. Invesco Mortgage Capital Inc. (IVR) has an EBITDA margin of 100.9%. This suggests that IVR underlying business is more profitable

Cash Flow



The value of a stock is simply the present value of its future free cash flows. IVR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.11. Comparatively, NAK’s free cash flow per share was -0.04.

Liquidity and Financial Risk

IVR’s debt-to-equity ratio is 7.98 versus a D/E of 0.00 for NAK. IVR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

IVR trades at a forward P/E of 9.20, a P/B of 0.86, and a P/S of 2.77, compared to a P/B of 1.24, for NAK. IVR 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. IVR is currently priced at a -7.75% to its one-year price target of 16.00. Comparatively, NAK is -79.68% relative to its price target of 2.51. This suggests that NAK 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. IVR has a beta of 0.68 and NAK’s beta is -0.20. NAK’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. IVR has a short ratio of 4.47 compared to a short interest of 30.19 for NAK. This implies that the market is currently less bearish on the outlook for IVR.

Summary




Northern Dynasty Minerals Ltd. (NYSE:NAK) beats Invesco Mortgage Capital Inc. (NYSE:IVR) on a total of 8 of the 13 factors compared between the two stocks. NAK is more profitable, higher liquidity and has lower financial risk. In terms of valuation, NAK is the cheaper of the two stocks on an earnings and sales basis, NAK is more undervalued relative to its price target. Finally, CERS has better sentiment signals based on short interest.

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