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.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like NOVA Group Holdings (HKG:1360). 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.
NOVA Group Holdings's Improving Profits
In the last three years NOVA Group Holdings'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. NOVA Group Holdings boosted its trailing twelve month EPS from HK$0.065 to HK$0.074, in the last year. That's a 14% gain; respectable growth in the broader scheme of things.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. NOVA Group Holdings shareholders can take confidence from the fact that EBIT margins are up from 30% to 47%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.
The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.
NOVA Group Holdings isn't a huge company, given its market capitalization of HK$2.3b. That makes it extra important to check on its balance sheet strength.
Are NOVA Group Holdings 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.
We did see some selling in the last twelve months, but that's insignificant compared to the whopping HK$61m that the , Wilson Lee spent acquiring shares. The average price paid was about HK$4.22. The quantum of that insider purchase is both rare and a sight to behold, not unlike an endangered Amur Leopard in the wild.
The good news, alongside the insider buying, for NOVA Group Holdings bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold HK$389m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. That amounts to 17% of the company, demonstrating a degree of high-level alignment with shareholders.
Is NOVA Group Holdings Worth Keeping An Eye On?
One positive for NOVA Group Holdings is that it is growing EPS. That's nice to see. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for my watchlist - and arguably a research priority. Of course, just because NOVA Group Holdings 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.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of NOVA Group Holdings, 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
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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