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. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in China Water Affairs Group (HKG:855). 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. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Fast Is China Water Affairs Group 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. 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, China Water Affairs Group's EPS has grown 28% each year, compound, over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.
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. China Water Affairs Group maintained stable EBIT margins over the last year, all while growing revenue 9.5% to HK$8.3b. 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.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for China Water Affairs Group.
Are China Water Affairs Group Insiders Aligned With All Shareholders?
Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. 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.
China Water Affairs Group top brass are certainly in sync, not having sold any shares, over the last year. But the bigger deal is that the Executive Director, Zhong Li, paid HK$715k to buy shares at an average price of HK$7.14.
The good news, alongside the insider buying, for China Water Affairs Group bulls is that insiders (collectively) have a meaningful investment in the stock. Notably, they have an enormous stake in the company, worth HK$3.2b. Coming in at 34% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. So it might be my imagination, but I do sense the glimmer of an opportunity.
Does China Water Affairs Group Deserve A Spot On Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about China Water Affairs Group's strong EPS growth. Better still, insiders own a large chunk of the company and one has even been buying more shares. So I do think this is one stock worth watching. Of course, just because China Water Affairs Group 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.
The good news is that China Water Affairs Group is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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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.