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 Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in SJM Holdings (HKG:880). While profit is not necessarily a social good, it's easy to admire a business than 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 SJM Holdings Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. Impressively, SJM Holdings has grown EPS by 20% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.
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. SJM Holdings's EBIT margins have actually improved by 3.1 percentage points in the last year, to reach 8.3%, but, on the flip side, revenue was down 21%. That's not ideal.
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.
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 SJM Holdings's future profits.
Are SJM Holdings Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a HK$43b company like SJM Holdings. But we are reassured by the fact they have invested in the company. Notably, they have an enormous stake in the company, worth HK$5.6b. Coming in at 13% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. Very encouraging.
It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations between HK$31b and HK$94b, like SJM Holdings, the median CEO pay is around HK$4.7m.
The SJM Holdings CEO received total compensation of just HK$2.3m 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 remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add SJM Holdings To Your Watchlist?
You can't deny that SJM Holdings has grown its earnings per share at a very impressive rate. That's attractive. If that's not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. This may only be a fast rundown, but the takeaway for me is that SJM Holdings is worth keeping an eye on. Of course, just because SJM 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.
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
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