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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 Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In contrast to all that, I prefer to spend time on companies like First United (NASDAQ:FUNC), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
First United's Earnings Per Share Are Growing.
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. I, for one, am blown away by the fact that First United has grown EPS by 50% per year, over the last three years. While that sort of growth rate isn't sustainable for long, it certainly catches my attention; like a crow with a sparkly stone.
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 First United's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. It seems First United is pretty stable, since revenue and EBIT margins are pretty flat year on year. That's not a major concern but nor does it point to the long term growth we like to see.
The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.
Since First United is no giant, with a market capitalization of US$124m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are First United Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. 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.
Despite -US$8.1 worth of sales, First United insiders have overwhelmingly been buying the stock, spending US$216k on purchases in the last twelve months. You could argue that level of buying implies genuine confidence in the business. We also note that it was the , John McCullough, who made the biggest single acquisition, paying US$70k for shares at about US$11.81 each.
It's reassuring that First United insiders are buying the stock, but that's not the only reason to think management are fair to shareholders. I refer to the very reasonable level of CEO pay. I discovered that the median total compensation for the CEOs of companies like First United with market caps under US$200m is about US$511k.
The First United CEO received US$400k in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. I'd also argue reasonable pay levels attest to good decision making more generally.
Does First United Deserve A Spot On Your Watchlist?
First United's earnings have taken off like any random crypto-currency did, back in 2017. The company can also boast of insider buying, and reasonable remuneration for the CEO. It could be that First United is at an inflection point, given the EPS growth. If so, then it the potential for further gains probably merit a spot on your watchlist. It is worth noting though that we have found 1 warning sign for First United that you need to take into consideration.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of First United, you'll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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