It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. 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.
In contrast to all that, I prefer to spend time on companies like Coastal Financial (NASDAQ:CCB), 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. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
How Fast Is Coastal Financial Growing?
As one of my mentors once told me, share price follows earnings per share (EPS). That makes EPS growth an attractive quality for any company. As a tree reaches steadily for the sky, Coastal Financial's EPS has grown 28% each year, compound, over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.
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 Coastal Financial'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 Coastal Financial's EBIT margins were flat over the last year, revenue grew by a solid 29% to US$46m. That's progress.
You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.
Fortunately, we've got access to analyst forecasts of Coastal Financial's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Coastal Financial Insiders Aligned With All Shareholders?
Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. 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.
Coastal Financial top brass are certainly in sync, not having sold any shares, over the last year. But my excitement comes from the US$101k that Executive VP and Chief Credit & Risk Officer Daniel Lee spent buying shares (at an average price of about US$15.29).
On top of the insider buying, it's good to see that Coastal Financial insiders have a valuable investment in the business. Indeed, they hold US$45m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. That amounts to 22% of the company, demonstrating a degree of high-level alignment with shareholders.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Eric Sprink, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Coastal Financial with market caps between US$100m and US$400m is about US$1.1m.
Coastal Financial offered total compensation worth US$866k to its CEO in the year to December 2018. That seems pretty reasonable, especially given its below the median for similar sized companies. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.
Is Coastal Financial Worth Keeping An Eye On?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Coastal Financial's strong EPS growth. Better still, insiders own a large chunk of the company and one has even been buying more shares. So it's fair to say I think this stock may well deserve a spot on your watchlist. Of course, just because Coastal Financial is growing does not mean it is undervalued. If you're wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
The good news is that Coastal Financial is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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