Enbridge Energy Partners, L.P. (NYSE:EEP) shares are down more than -20.35% this year and recently decreased -0.90% or -$0.1 to settle at $11.00. MFA Financial, Inc. (NYSE:MFA), on the other hand, is down -11.24% year to date as of 11/20/2018. It currently trades at $7.03 and has returned -1.40% during the past week.
Enbridge Energy Partners, L.P. (NYSE:EEP) and MFA Financial, Inc. (NYSE:MFA) are the two most active stocks based on recent trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.Growth
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect EEP to grow earnings at a 14.20% annual rate over the next 5 years. Comparatively, MFA is expected to grow at a 2.17% annual rate. All else equal, EEP’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 132.78% for MFA Financial, Inc. (MFA). EEP’s ROI is 12.90% while MFA has a ROI of 3.20%. The interpretation is that EEP’s business generates a higher return on investment than MFA’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. EEP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, MFA’s free cash flow per share was -0.09. On a percent-of-sales basis, EEP’s free cash flow was 2.28% while MFA converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, EEP is able to generate more free cash flow for investors.Liquidity and Financial Risk
EEP’s debt-to-equity ratio is 5.49 versus a D/E of 2.05 for MFA. EEP is therefore the more solvent of the two companies, and has lower financial risk.
EEP trades at a forward P/E of 13.99, a P/B of 3.48, and a P/S of 1.56, compared to a forward P/E of 9.32, a P/B of 0.85, and a P/S of 5.05 for MFA. EEP is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. EEP is currently priced at a -7.72% to its one-year price target of 11.92. Comparatively, MFA is -6.89% relative to its price target of 7.55. This suggests that EEP 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. EEP has a beta of 1.23 and MFA’s beta is 0.45. MFA’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. EEP has a short ratio of 3.71 compared to a short interest of 1.21 for MFA. This implies that the market is currently less bearish on the outlook for MFA.Summary
MFA Financial, Inc. (NYSE:MFA) beats Enbridge Energy Partners, L.P. (NYSE:EEP) on a total of 7 of the 14 factors compared between the two stocks. MFA is growing fastly and has lower financial risk. In terms of valuation, MFA is the cheaper of the two stocks on an earnings and book value, Finally, MFA has better sentiment signals based on short interest.