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 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 the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Power REIT (NYSEMKT:PW). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
Power REIT's Improving Profits
In the last three years Power REIT's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. Thus, it makes sense to focus on more recent growth rates, instead. Power REIT has grown its trailing twelve month EPS from US$0.31 to US$0.33, in the last year. That's a modest gain of 5.1%.
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). Not all of Power REIT's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. Power REIT maintained stable EBIT margins over the last year, all while growing revenue 3.0% to US$2.0m. That's a real positive.
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.
Power REIT isn't a huge company, given its market capitalization of US$18m. That makes it extra important to check on its balance sheet strength.
Are Power REIT 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. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
Power REIT top brass are certainly in sync, not having sold any shares, over the last year. But the bigger deal is that the Chairman, David Lesser, paid US$54k to buy shares at an average price of US$5.95.
It's me that Power REIT insiders are buying the stock, but that's not the only reason to think leader are fair to shareholders. Specifically, the CEO is paid quite reasonably for a company of this size. I discovered that the median total compensation for the CEOs of companies like Power REIT with market caps under US$200m is about US$529k.
The CEO of Power REIT only received US$241k in total compensation for the year ending December 2018. That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of a culture of integrity, in a broader sense.
Does Power REIT Deserve A Spot On Your Watchlist?
One positive for Power REIT is that it is growing EPS. That's nice to see. And that's not all, folks. We've also seen insiders buying stock, and noted modest executive pay. The sum of all that, for me, points to a quality business, and a genuine prospect for further research. Now, you could try to make up your mind on Power REIT by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
As a growth investor I do like to see insider buying. But Power REIT 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 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.
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