Critical Contrast: Two Harbors Investments (NYSE:TWO) versus Ares Commercial Real Estate (NYSE:ACRE)

Ares Commercial Real Estate (NYSE:ACRE) and Two Harbors Investments (NYSE:TWO) are both small-cap finance companies, but which is the superior business? We will contrast the two companies based on the strength of their risk, dividends, profitability, valuation, institutional ownership, earnings and analyst recommendations.

Institutional and Insider Ownership

41.3% of Ares Commercial Real Estate shares are owned by institutional investors. Comparatively, 64.2% of Two Harbors Investments shares are owned by institutional investors. 1.8% of Ares Commercial Real Estate shares are owned by insiders. Comparatively, 0.7% of Two Harbors Investments shares are owned by insiders. Strong institutional ownership is an indication that hedge funds, large money managers and endowments believe a company will outperform the market over the long term.

Earnings & Valuation

This table compares Ares Commercial Real Estate and Two Harbors Investments”s gross revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Ares Commercial Real Estate	$69.65 million	4.13	-$34.99 million	($0.15)	-34.83
Two Harbors Investments	$450.15 million	2.64	$298.17 million	($2.50)	-4.57

Two Harbors Investments has higher revenue and earnings than Ares Commercial Real Estate. Ares Commercial Real Estate is trading at a lower price-to-earnings ratio than Two Harbors Investments, indicating that it is currently the more affordable of the two stocks.

Analyst Recommendations

This is a breakdown of current recommendations and price targets for Ares Commercial Real Estate and Two Harbors Investments, as reported by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Ares Commercial Real Estate	1	3	1	1	2.33
Two Harbors Investments	2	7	0	0	1.78

Ares Commercial Real Estate currently has a consensus price target of $5.33, suggesting a potential upside of 2.07%. Two Harbors Investments has a consensus price target of $12.46, suggesting a potential upside of 9.14%. Given Two Harbors Investments’ higher possible upside, analysts plainly believe Two Harbors Investments is more favorable than Ares Commercial Real Estate.

Profitability

This table compares Ares Commercial Real Estate and Two Harbors Investments’ net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Ares Commercial Real Estate	-13.02%	-5.15%	-1.80%
Two Harbors Investments	-44.10%	11.92%	1.32%

Risk and Volatility

Ares Commercial Real Estate has a beta of 1.26, suggesting that its stock price is 26% more volatile than the S&P 500. Comparatively, Two Harbors Investments has a beta of 1.19, suggesting that its stock price is 19% more volatile than the S&P 500.

Dividends

Ares Commercial Real Estate pays an annual dividend of $0.60 per share and has a dividend yield of 11.5%. Two Harbors Investments pays an annual dividend of $1.36 per share and has a dividend yield of 11.9%. Ares Commercial Real Estate pays out -400.0% of its earnings in the form of a dividend. Two Harbors Investments pays out -54.4% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. Two Harbors Investments has raised its dividend for 1 consecutive years. Two Harbors Investments is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

About Ares Commercial Real Estate

Ares Commercial Real Estate Corporation, a specialty finance company, originates and invests in commercial real estate (CRE) loans and related investments in the United States. It provides a range of financing solutions for the owners, operators, and sponsors of CRE properties. The company originates senior mortgage loans, subordinate debt and preferred equity products, mezzanine loans, and other CRE investments, including commercial mortgage-backed securities. It has elected and qualified to be taxed as a real estate investment trust for the United States federal income tax purposes under the Internal Revenue Code of 1986. Ares Commercial Real Estate Corporation was incorporated in 2011 and is based in New York, New York.

About Two Harbors Investments

Two Harbors Investment Corp. invests in, finances, and manages mortgage servicing rights (MSRs), agency residential mortgage-backed securities (RMBS), and other financial assets through RoundPoint in the United States. The company target assets include agency RMBS collateralized by fixed rate mortgage loans, adjustable rate mortgage loans, hybrid mortgage loans, or derivatives; and other assets, such as financial and mortgage-related assets, including non-agency securities and non-hedging transactions. It qualifies as a REIT for federal income tax purposes. As a REIT, the company must distribute at least 90% of annual taxable income to its stockholders. Two Harbors Investment Corp. was incorporated in 2009 and is headquartered in St. Louis Park, Minnesota.