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Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
So if you're like me, you might be more interested in profitable, growing companies, like Oak Valley Bancorp (NASDAQ:OVLY). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
Oak Valley Bancorp's Earnings Per Share Are Growing.
As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. Over the last three years, Oak Valley Bancorp has grown EPS by 14% per year. That's a good rate of growth, if it can be sustained.
One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. I note that Oak Valley Bancorp's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. While we note Oak Valley Bancorp's EBIT margins were flat over the last year, revenue grew by a solid 4.6% to US$48m. That's a real positive.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
Since Oak Valley Bancorp is no giant, with a market capitalization of US$155m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Oak Valley Bancorp 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, small purchases are not always indicative of conviction, and insiders don't always get it right.
While Oak Valley Bancorp insiders did net -US$14k selling stock over the last year, they invested US$523k, a much higher figure. On balance, to me, this signals their optimism. It is also worth noting that it was Independent Director H. Holder who made the biggest single purchase, worth US$155k, paying US$15.47 per share.
On top of the insider buying, it's good to see that Oak Valley Bancorp insiders have a valuable investment in the business. To be specific, they have US$29m worth of shares. That's a lot of money, and no small incentive to work hard. Those holdings account for over 19% of the company; visible skin in the game.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Chris Courtney is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations between US$100m and US$400m, like Oak Valley Bancorp, the median CEO pay is around US$903k.
Oak Valley Bancorp offered total compensation worth US$769k to its CEO in the year to . That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add Oak Valley Bancorp To Your Watchlist?
One important encouraging feature of Oak Valley Bancorp is that it is growing profits. Better yet, insiders are significant shareholders, and have been buying more shares. To me, that all makes it well worth a spot on your watchlist, as well as continuing research. You should always think about risks though. Case in point, we've spotted 1 warning sign for Oak Valley Bancorp you should be aware of.
As a growth investor I do like to see insider buying. But Oak Valley Bancorp isn't the only one. You can see a a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
This article by Simply Wall St is general in nature. 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.
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