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. 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 Ares Commercial Real Estate (NYSE:ACRE), which has not only revenues, but also profits. 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 Quickly Is Ares Commercial Real Estate Increasing Earnings Per Share?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That makes EPS growth an attractive quality for any company. We can see that in the last three years Ares Commercial Real Estate grew its EPS by 15% per year. That growth rate is fairly good, assuming the company can keep it up.
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 Ares Commercial Real Estate'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 Ares Commercial Real Estate's EBIT margins were flat over the last year, revenue grew by a solid 23% to US$64m. That's a real positive.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
Fortunately, we've got access to analyst forecasts of Ares Commercial Real Estate's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Ares Commercial Real Estate 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. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
Ares Commercial Real Estate insiders both bought and sold shares over the last twelve months, but they did end up spending US$6.3k more on stock than they received from selling it. When you weigh that up, it is a mild positive, indicating increased alignment between shareholders and management. We also note that it was the Director, Rand April, who made the biggest single acquisition, paying US$150k for shares at about US$15.42 each.
It's me that Ares Commercial Real Estate insiders are buying the stock, but that's not the only reason to think leader are fair to shareholders. Specifically, the CEO is paid quite reasonably for a company of this size. I discovered that the median total compensation for the CEOs of companies like Ares Commercial Real Estate with market caps between US$200m and US$800m is about US$1.8m.
The CEO of Ares Commercial Real Estate only received US$560k in total compensation for the year ending December 2018. That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. 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.
Does Ares Commercial Real Estate Deserve A Spot On Your Watchlist?
As I already mentioned, Ares Commercial Real Estate is a growing business, which is what I like to see. Like chocolate chips in vanilla ice cream, the insider buying, and modest CEO pay, make it better. If that doesn't automatically earn it a spot on your watchlist then I'd posit it warrants a closer look at the very least. Once you've identified a business you like, the next step is to consider what you think it's worth. And right now is your chance to view our exclusive discounted cashflow valuation of Ares Commercial Real Estate. You might benefit from giving it a glance today.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Ares Commercial Real Estate, 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
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