It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
In contrast to all that, I prefer to spend time on companies like Sierra Bancorp (NASDAQ:BSRR), which has not only revenues, but also profits. 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. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
How Fast Is Sierra Bancorp Growing?
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. As a tree reaches steadily for the sky, Sierra Bancorp's EPS has grown 20% each year, compound, over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.
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 Sierra Bancorp's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Sierra Bancorp maintained stable EBIT margins over the last year, all while growing revenue 5.0% to US$116m. That's progress.
You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Sierra Bancorp's forecast profits?
Are Sierra 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. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
It's a pleasure to note that insiders spent US$1.0m buying Sierra Bancorp shares, over the last year, without reporting any share sales whatsoever. As if for a flower bud approaching bloom, I become an expectant observer, anticipating with hope, that something splendid is coming. We also note that it was the Executive VP & Chief Banking Officer, Michael Olague, who made the biggest single acquisition, paying US$403k for shares at about US$26.89 each.
The good news, alongside the insider buying, for Sierra Bancorp bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold US$38m worth of its stock. That's a lot of money, and no small incentive to work hard. Those holdings account for over 8.6% of the company; visible skin in the game.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Kevin McPhaill, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Sierra Bancorp with market caps between US$200m and US$800m is about US$1.7m.
Sierra Bancorp offered total compensation worth US$950k to its CEO in the year to December 2018. That seems pretty reasonable, especially given its below the median for similar sized companies. 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Should You Add Sierra Bancorp To Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Sierra Bancorp's strong EPS growth. Not only that, but we can see that insiders both own a lot of, and are buying more, shares in the company. So it's fair to say I think this stock may well deserve a spot on your watchlist. While we've looked at the quality of the earnings, we haven't yet done any work to value the stock. So if you like to buy cheap, you may want to check if Sierra Bancorp is trading on a high P/E or a low P/E, relative to its industry.
As a growth investor I do like to see insider buying. But Sierra 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
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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