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 as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
So if you're like me, you might be more interested in profitable, growing companies, like Objective (ASX:OCL). 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. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Quickly Is Objective Increasing Earnings Per Share?
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, Objective's EPS has grown 19% each year, compound, over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.
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. While revenue is looking a bit flat, the good news is EBIT margins improved by 3.2 percentage points to 18%, in the last twelve months. That's something to smile about.
In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.
Since Objective is no giant, with a market capitalization of AU$418m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Objective Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
We haven't seen any insiders selling Objective shares, in the last year. So it's definitely nice that Darc Dencker-Rasmussen bought AU$25k worth of shares at an average price of around AU$2.77.
I do like that insiders have been buying shares in Objective, but there is more evidence of shareholder friendly management. I refer to the very reasonable level of CEO pay. For companies with market capitalizations between AU$146m and AU$585m, like Objective, the median CEO pay is around AU$686k.
The Objective CEO received total compensation of just AU$301k in the year to June 2019. 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.
Is Objective Worth Keeping An Eye On?
You can't deny that Objective has grown its earnings per share at a very impressive rate. That's attractive. And that's not the only positive, either. We have both insider buying and reasonable and remuneration to consider. On balance the message seems to be that this stock is worth looking at, at least for a while. 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 Objective is trading on a high P/E or a low P/E, relative to its industry.
The good news is that Objective 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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