Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Deswell Industries (NASDAQ:DSWL). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
How Fast Is Deswell Industries Growing Its Earnings Per Share?
Over the last three years, Deswell Industries has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. As a result, I'll zoom in on growth over the last year, instead. Deswell Industries boosted its trailing twelve month EPS from US$0.27 to US$0.33, in the last year. I doubt many would complain about that 22% gain.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). While we note Deswell Industries's EBIT margins were flat over the last year, revenue grew by a solid 22% to US$66m. That's a real positive.
In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.
Since Deswell Industries is no giant, with a market capitalization of US$47m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Deswell Industries Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
One shining light for Deswell Industries is the serious outlay one insider has made to buy shares, in the last year. Specifically, in one large transaction Chairman of the Board Pui Lau paid US$567k, for stock at US$3.40 per share. Big insider buys like that are almost as rare as an ocean free of single use plastic waste.
And the insider buying isn't the only sign of alignment between shareholders and the board, since Deswell Industries insiders own more than a third of the company. Indeed, with a collective holding of 60%, company insiders are in control and have plenty of capital behind the venture. This makes me think they will be incentivised to plan for the long term - something I like to see. With that sort of holding, insiders have about US$28m riding on the stock, at current prices. That's nothing to sneeze at!
Should You Add Deswell Industries To Your Watchlist?
One important encouraging feature of Deswell Industries is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. To me, that all makes it well worth a spot on your watchlist, as well as continuing research. 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 Deswell Industries is trading on a high P/E or a low P/E, relative to its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Deswell Industries, 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
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.