ON Semiconductor Corporation (NASDAQ:ON) shares are down more than -11.80% this year and recently decreased -4.55% or -$0.88 to settle at $18.47. Sprouts Farmers Market, Inc. (NASDAQ:SFM), on the other hand, is down -0.82% year to date as of 12/04/2018. It currently trades at $24.15 and has returned -9.55% during the past week.
ON Semiconductor Corporation (NASDAQ:ON) and Sprouts Farmers Market, Inc. (NASDAQ:SFM) are the two most active stocks based on recent trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.Growth
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect ON to grow earnings at a 12.79% annual rate over the next 5 years. Comparatively, SFM is expected to grow at a 13.92% annual rate. All else equal, SFM’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 6.7% for Sprouts Farmers Market, Inc. (SFM). ON’s ROI is 8.10% while SFM has a ROI of 14.10%. The interpretation is that SFM’s business generates a higher return on investment than ON’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. ON’s free cash flow (“FCF”) per share for the trailing twelve months was +0.52. Comparatively, SFM’s free cash flow per share was +0.16. On a percent-of-sales basis, ON’s free cash flow was 3.95% while SFM converted 0.44% of its revenues into cash flow. This means that, for a given level of sales, ON 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. ON has a current ratio of 2.40 compared to 1.20 for SFM. This means that ON can more easily cover its most immediate liabilities over the next twelve months. ON’s debt-to-equity ratio is 0.85 versus a D/E of 0.88 for SFM. SFM is therefore the more solvent of the two companies, and has lower financial risk.Valuation
ON trades at a forward P/E of 9.69, a P/B of 2.47, and a P/S of 1.37, compared to a forward P/E of 17.89, a P/B of 4.77, and a P/S of 0.71 for SFM. 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. ON is currently priced at a -16.54% to its one-year price target of 22.13. Comparatively, SFM is -14.96% relative to its price target of 28.40. This suggests that ON 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. ON has a beta of 2.02 and SFM’s beta is 0.82. SFM’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. ON has a short ratio of 4.03 compared to a short interest of 5.99 for SFM. This implies that the market is currently less bearish on the outlook for ON.Summary
ON Semiconductor Corporation (NASDAQ:ON) beats Sprouts Farmers Market, Inc. (NASDAQ:SFM) on a total of 10 of the 14 factors compared between the two stocks. ON is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, ON is the cheaper of the two stocks on an earnings and book value, ON is more undervalued relative to its price target. Finally, ON has better sentiment signals based on short interest.