Cypress Semiconductor Corporation (NASDAQ:CY) shares are up more than 84.59% this year and recently increased 0.13% or $0.03 to settle at $23.48. Extraction Oil & Gas, Inc. (NASDAQ:XOG), on the other hand, is down -66.43% year to date as of 12/02/2019. It currently trades at $1.44 and has returned -9.43% during the past week.
Cypress Semiconductor Corporation (NASDAQ:CY) and Extraction Oil & Gas, Inc. (NASDAQ:XOG) are the two most active stocks in the Semiconductor – Broad Line industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CY to grow earnings at a -2.20% annual rate over the next 5 years. Comparatively, XOG is expected to grow at a 30.00% annual rate. All else equal, XOG’s higher growth rate would imply a greater potential for capital appreciation.
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 84.94% for Extraction Oil & Gas, Inc. (XOG). CY’s ROI is 16.00% while XOG has a ROI of 7.90%. The interpretation is that CY’s business generates a higher return on investment than XOG’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. CY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.04. Comparatively, XOG’s free cash flow per share was -0.99. On a percent-of-sales basis, CY’s free cash flow was 0.6% while XOG converted -12.94% of its revenues into cash flow. This means that, for a given level of sales, CY 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. CY has a current ratio of 1.70 compared to 0.60 for XOG. This means that CY can more easily cover its most immediate liabilities over the next twelve months. CY’s debt-to-equity ratio is 0.39 versus a D/E of 1.01 for XOG. XOG is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CY trades at a forward P/E of 18.65, a P/B of 4.13, and a P/S of 3.86, compared to a P/B of 0.12, and a P/S of 0.23 for XOG. CY is the expensive of the two stocks on an earnings, book value and sales basis. 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. CY is currently priced at a -1.26% to its one-year price target of 23.78. Comparatively, XOG is -63.36% relative to its price target of 3.93. This suggests that XOG is the better investment over the next year.
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. CY has a short ratio of 9.71 compared to a short interest of 11.58 for XOG. This implies that the market is currently less bearish on the outlook for CY.
Extraction Oil & Gas, Inc. (NASDAQ:XOG) beats Cypress Semiconductor Corporation (NASDAQ:CY) on a total of 8 of the 14 factors compared between the two stocks. XOG generates a higher return on investment and is more profitable. In terms of valuation, XOG is the cheaper of the two stocks on an earnings, book value and sales basis, XOG is more undervalued relative to its price target.