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.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Karelia Tobacco (ATH:KARE). 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.
Karelia Tobacco's Earnings Per Share Are Growing.
As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Karelia Tobacco managed to grow EPS by 9.1% per year, over three years. That's a good rate of growth, if it can be sustained.
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. Karelia Tobacco's EBIT margins have fallen over the last twelve months, but the flat revenue sends a message of stability. That doesn't inspire a great deal of confidence.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are Karelia Tobacco Insiders Aligned With All Shareholders?
Personally, I like to see high insider ownership of a company, since it suggests that it will be managed in the interests of shareholders. So as you can imagine, the fact that Karelia Tobacco insiders own a significant number of shares certainly appeals to me. Indeed, with a collective holding of 88%, company insiders are in control and have plenty of capital behind the venture. This makes me think they will be incentivised to plan for the long term - something I like to see. And their holding is extremely valuable at the current share price, totalling €723m. Now that's what I call some serious skin in the game!
Is Karelia Tobacco Worth Keeping An Eye On?
As I already mentioned, Karelia Tobacco is a growing business, which is what I like to see. If that's not enough on its own, there is also the rather notable levels of insider ownership. That combination appeals to me, for one. So yes, I do think the stock is worth keeping an eye on. While we've looked at the quality of the earnings, we haven't yet done any work to value the stock. So if you like to buy cheap, you may want to check if Karelia Tobacco is trading on a high P/E or a low P/E, relative to 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
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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