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Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. 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.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Innovative Industrial Properties (NYSE:IIPR). 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. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
Innovative Industrial Properties's Improving Profits
In a capitalist society capital chases profits, and that means share prices tend rise with earnings per share (EPS). So like a ray of sunshine through a gap in the clouds, improving EPS is considered a good sign. It is therefore awe-striking that Innovative Industrial Properties's EPS went from US$0.18 to US$1.00 in just one year. When you see earnings grow that quickly, it often means good things ahead for the company.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. The good news is that Innovative Industrial Properties is growing revenues, and EBIT margins improved by 27 percentage points to 43%, over the last year. 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.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Innovative Industrial Properties.
Are Innovative Industrial Properties 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. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
We do note that, in the last year, insiders sold -US$464.1k worth of shares. But that's far less than the US$2.8m insiders spend purchasing stock. This makes me even more interested in Innovative Industrial Properties because it suggests that those who understand the company best, are optimistic. It is also worth noting that it was Executive Chairman Alan Gold who made the biggest single purchase, worth US$2.7m, paying US$40.00 per share.
Along with the insider buying, another encouraging sign for Innovative Industrial Properties is that insiders, as a group, have a considerable shareholding. Given insiders own a small fortune of shares, currently valued at US$69m, they have plenty of motivation to push the business to succeed. This should keep them focused on creating long term value for shareholders.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Paul Smithers is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like Innovative Industrial Properties with market caps between US$1.0b and US$3.2b is about US$4.1m.
The Innovative Industrial Properties CEO received total compensation of just US$1.1m in the year to December 2018. That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. 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 good governance, more generally.
Does Innovative Industrial Properties Deserve A Spot On Your Watchlist?
Innovative Industrial Properties's earnings per share have taken off like a rocket aimed right at the moon. The company can also boast of insider buying, and reasonable remuneration for the CEO. It could be that Innovative Industrial Properties is at an inflection point, given the EPS growth. If so, then it the potential for further gains probably merit a spot on your watchlist. Of course, profit growth is one thing but it's even better if Innovative Industrial Properties is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average in its industry.
The good news is that Innovative Industrial Properties is not the only growth stock with insider buying. Here's a 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
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.