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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. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.
In contrast to all that, I prefer to spend time on companies like Innovative Industrial Properties (NYSE:IIPR), 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. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
Innovative Industrial Properties'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 it's no surprise that some investors are more inclined to invest in profitable businesses. Like a firecracker arcing through the night sky, Innovative Industrial Properties's EPS shot from US$0.61 to US$1.47, over the last year. You don't see 141% year-on-year growth like that, very often. That could be a sign that the business has reached a true inflection point.
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. Innovative Industrial Properties shareholders can take confidence from the fact that EBIT margins are up from 33% to 51%, and revenue is growing. That's great to see, on both counts.
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.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Innovative Industrial Properties's forecast profits?
Are Innovative Industrial Properties 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.
In the last year insider at Innovative Industrial Properties were both selling and buying shares; but happily, as a group they spent US$178k more on stock, than they netted from selling it. On balance, that's a good sign. It is also worth noting that it was Executive Chairman Alan Gold who made the biggest single purchase, worth US$188k, paying US$75.02 per share.
The good news, alongside the insider buying, for Innovative Industrial Properties bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold US$40m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that's only about 3.9% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
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, Paul Smithers is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like Innovative Industrial Properties with market caps between US$400m and US$1.6b is about US$2.5m.
The Innovative Industrial Properties CEO received total compensation of just US$1.1m in the year to December 2018. That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.
Is Innovative Industrial Properties Worth Keeping An Eye On?
Innovative Industrial Properties's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. What's more insiders own a significant stake in the company and have been buying more shares. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Innovative Industrial Properties deserves timely attention. Another important measure of business quality not discussed here, is return on equity (ROE). Click on this link to see how Innovative Industrial Properties shapes up to industry peers, when it comes to ROE.
As a growth investor I do like to see insider buying. But Innovative Industrial Properties 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 email@example.com. 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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