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. 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 SmartFinancial (NASDAQ:SMBK). 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.
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How Quickly Is SmartFinancial Increasing Earnings Per Share?
If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. I, for one, am blown away by the fact that SmartFinancial has grown EPS by 46% 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 glint in the eye of my lover.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. I note that SmartFinancial's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. While we note SmartFinancial's EBIT margins were flat over the last year, revenue grew by a solid 47% to US$85m. That's progress.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for SmartFinancial's future profits.
Are SmartFinancial 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. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
While SmartFinancial insiders did net -US$485.0k selling stock over the last year, they invested US$697k, a much higher figure. On balance, to me, this signals their optimism. It is also worth noting that it was J. Wicks who made the biggest single purchase, worth US$254k, paying US$24.74 per share.
Along with the insider buying, another encouraging sign for SmartFinancial is that insiders, as a group, have a considerable shareholding. To be specific, they have US$31m worth of shares. That's a lot of money, and no small incentive to work hard. That amounts to 10% of the company, demonstrating a degree of high-level alignment with shareholders.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Billy Carroll is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like SmartFinancial with market caps between US$200m and US$800m is about US$1.8m.
The SmartFinancial CEO received total compensation of just US$612k in the year to 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Should You Add SmartFinancial To Your Watchlist?
SmartFinancial's earnings per share growth has been so hot recently that thinking about it is making me blush. Better yet, we can observe insider buying and the chief executive pay looks reasonable. The strong EPS growth suggests SmartFinancial may be at an inflection point. For those chasing fast growth, then, I'd suggest to stock merits monitoring. Of course, identifying quality businesses is only half the battle; investors need to know whether the stock is undervalued. So you might want to consider this free discounted cashflow valuation of SmartFinancial.
As a growth investor I do like to see insider buying. But SmartFinancial 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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