For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.
So if you're like me, you might be more interested in profitable, growing companies, like Federal Agricultural Mortgage (NYSE:AGM). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
Federal Agricultural Mortgage's Improving Profits
Even with very modest growth rates, a company will usually do well if it improves earnings per share (EPS) year after year. So EPS growth can certainly encourage an investor to take note of a stock. Federal Agricultural Mortgage boosted its trailing twelve month EPS from US$8.31 to US$9.99, in the last year. That's a 20% gain; respectable growth in the broader scheme of things.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. I note that Federal Agricultural Mortgage's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Federal Agricultural Mortgage maintained stable EBIT margins over the last year, all while growing revenue 22% to US$238m. That's a real positive.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are Federal Agricultural Mortgage Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
While Federal Agricultural Mortgage insiders did net -US$282k selling stock over the last year, they invested US$740k, a much higher figure. On balance, to me, this signals their optimism. We also note that it was the Independent Director, James Engebretsen, who made the biggest single acquisition, paying US$507k for shares at about US$102 each.
On top of the insider buying, it's good to see that Federal Agricultural Mortgage insiders have a valuable investment in the business. To be specific, they have US$17m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that's only about 1.5% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
Should You Add Federal Agricultural Mortgage To Your Watchlist?
One positive for Federal Agricultural Mortgage is that it is growing EPS. That's nice to see. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for my watchlist - and arguably a research priority. Of course, just because Federal Agricultural Mortgage is growing does not mean it is undervalued. If you're wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Federal Agricultural Mortgage, you'll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.