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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Clinuvel Pharmaceuticals (ASX:CUV). 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. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
Clinuvel Pharmaceuticals's Improving Profits
Over the last three years, Clinuvel Pharmaceuticals 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. Thus, it makes sense to focus on more recent growth rates, instead. Like a wedge-tailed eagle on the wind, Clinuvel Pharmaceuticals's EPS soared from AU$0.28 to AU$0.38, in just one year. That's a commendable gain of 36%.
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). I note that Clinuvel Pharmaceuticals's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. The good news is that Clinuvel Pharmaceuticals is growing revenues, and EBIT margins improved by 5.8 percentage points to 54%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
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.
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 Clinuvel Pharmaceuticals.
Are Clinuvel Pharmaceuticals 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. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
We haven't seen any insiders selling Clinuvel Pharmaceuticals shares, in the last year. With that in mind, it's heartening that Jeffrey Rosenfeld, the Non Executive Director of the company, paid AU$30k for shares at around AU$27.44 each.
Along with the insider buying, another encouraging sign for Clinuvel Pharmaceuticals is that insiders, as a group, have a considerable shareholding. Notably, they have an enormous stake in the company, worth AU$194m. Coming in at 15% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. Very encouraging.
Does Clinuvel Pharmaceuticals Deserve A Spot On Your Watchlist?
You can't deny that Clinuvel Pharmaceuticals has grown its earnings per share at a very impressive rate. That's attractive. 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. One of Buffett's considerations when discussing businesses is if they are capital light or capital intensive. Generally, a company with a high return on equity is capital light, and can thus fund growth more easily. So you might want to check this graph comparing Clinuvel Pharmaceuticals's ROE with industry peers (and the market at large).
As a growth investor I do like to see insider buying. But Clinuvel Pharmaceuticals 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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