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 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 contrast to all that, I prefer to spend time on companies like Guaranty Federal Bancshares (NASDAQ:GFED), which has not only revenues, but also profits. While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
Guaranty Federal Bancshares's Earnings Per Share Are Growing.
As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. As a tree reaches steadily for the sky, Guaranty Federal Bancshares's EPS has grown 26% 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 Guaranty Federal Bancshares'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 Guaranty Federal Bancshares's EBIT margins were flat over the last year, revenue grew by a solid 33% to US$41m. That's progress.
You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.
Guaranty Federal Bancshares isn't a huge company, given its market capitalization of US$106m. That makes it extra important to check on its balance sheet strength.
Are Guaranty Federal Bancshares Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
It's good to see Guaranty Federal Bancshares insiders walking the walk, by spending US$200k on shares in just twelve months. And when you consider that there was no insider selling, you can understand why shareholders might believe that lady luck will grace this business. It is also worth noting that it was Director John Griesemer who made the biggest single purchase, worth US$117k, paying US$23.88 per share.
Should You Add Guaranty Federal Bancshares To Your Watchlist?
You can't deny that Guaranty Federal Bancshares has grown its earnings per share at a very impressive rate. That's attractive. The growth rate whets my appetite for research, and the insider buying only increases my interest in the stock. So on this analysis I believe Guaranty Federal Bancshares is probably worth spending some time on. Of course, just because Guaranty Federal Bancshares 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.
As a growth investor I do like to see insider buying. But Guaranty Federal Bancshares 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
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