AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) shares are down more than -42.22% this year and recently increased 30.86% or $0.21 to settle at $0.92. Reliance Steel & Aluminum Co. (NYSE:RS), on the other hand, is up 44.78% year to date as of 09/10/2019. It currently trades at $103.04 and has returned 6.66% during the past week.
AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) and Reliance Steel & Aluminum Co. (NYSE:RS) are the two most active stocks in the Biotechnology industry based on today’s 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, RS is expected to grow at a 3.68% annual rate. All else equal, RS’s higher growth rate would imply a greater potential for capital appreciation.
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 9.71% for Reliance Steel & Aluminum Co. (RS). AVEO’s ROI is 313.00% while RS has a ROI of 10.60%. The interpretation is that AVEO’s business generates a higher return on investment than RS’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. AVEO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.04. Comparatively, RS’s free cash flow per share was +3.50. On a percent-of-sales basis, AVEO’s free cash flow was -0.12% while RS converted 2.02% of its revenues into cash flow. This means that, for a given level of sales, RS is able to generate more free cash flow for investors.
Liquidity and leverage ratios are important because they reveal the financial health of a company. AVEO has a current ratio of 2.20 compared to 4.40 for RS. This means that RS can more easily cover its most immediate liabilities over the next twelve months. AVEO’s debt-to-equity ratio is 12.13 versus a D/E of 0.41 for RS. AVEO is therefore the more solvent of the two companies, and has lower financial risk.Valuation
AVEO trades at a P/B of 92.45, and a P/S of 23.74, compared to a forward P/E of 12.57, a P/B of 1.40, and a P/S of 0.59 for RS. AVEO is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. AVEO is currently priced at a -34.29% to its one-year price target of 1.40. Comparatively, RS is 0.63% relative to its price target of 102.40. This suggests that AVEO is the better investment over the next year.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. AVEO has a beta of 0.67 and RS’s beta is 1.31. AVEO’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. AVEO has a short ratio of 8.29 compared to a short interest of 3.69 for RS. This implies that the market is currently less bearish on the outlook for RS.
Reliance Steel & Aluminum Co. (NYSE:RS) beats AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) on a total of 10 of the 14 factors compared between the two stocks. RS generates a higher return on investment, 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, RS is the cheaper of the two stocks on book value and sales basis, Finally, RS has better sentiment signals based on short interest.