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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 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 Digital Realty Trust (NYSE:DLR), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business than can consistently produce it. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
Digital Realty Trust's Earnings Per Share Are 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. It's no surprise, then, that I like to invest in companies with EPS growth. Digital Realty Trust managed to grow EPS by 4.6% per year, over three years. While that sort of growth rate isn't amazing, it does show the business is growing.
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. Digital Realty Trust maintained stable EBIT margins over the last year, all while growing revenue 18% to US$3.2b. That's progress.
The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
Fortunately, we've got access to analyst forecasts of Digital Realty Trust's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Digital Realty Trust Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$25b company like Digital Realty Trust. But we do take comfort from the fact that they are investors in the company. To be specific, they have US$13m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 0.05% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
Should You Add Digital Realty Trust To Your Watchlist?
One important encouraging feature of Digital Realty Trust is that it is growing profits. Just as polish makes silverware pop, the high level of insider ownership enhances my enthusiasm for this growth. The combination sparks joy for me, so I'd consider keeping the company on a watchlist. Of course, profit growth is one thing but it's even better if Digital Realty Trust is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average in its industry.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access 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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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.