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.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like BlueScope Steel (ASX:BSL). 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.
BlueScope Steel’s Improving Profits
In the last three years BlueScope Steel’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. Like the last firework on New Year’s Eve accelerating into the sky, BlueScope Steel’s EPS shot from AU$1.45 to AU$3.23, over the last year. Year on year growth of 123% is certainly a sight to behold.
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. The good news is that BlueScope Steel is growing revenues, and EBIT margins improved by 3.4 percentage points to 13%, over the last year. That’s great to see, on both counts.
The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. To that end, right now and today, you can check our visualization of consensus analyst forecasts for future BlueScope Steel EPS 100% free.
Are BlueScope Steel 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 do note that BlueScope Steel insiders netted -AU$75.3k worth of shares over the last year. But the silver lining to that cloud is that Jennifer Lambert, the Non-Executive Director, spent AU$102k buying shares at an average price of AU$17.07. And that’s a reason to be optimistic.
On top of the insider buying, it’s good to see that BlueScope Steel insiders have a valuable investment in the business. Indeed, they hold AU$66m worth of its stock. That’s a lot of money, and no small incentive to work hard. Despite being just 1.0% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
Does BlueScope Steel Deserve A Spot On Your Watchlist?
BlueScope Steel’s earnings have taken off like any random crypto-currency did, back in 2017. If you’re like me, you’ll find it hard to ignore that sort of explosive EPS growth. And indeed, it could be a sign that the business is at an inflection point. For me, this situation certainly piques my interest. Of course, identifying quality businesses is only half the battle; investors need to know whether the stock is undervalued. So you might want to consider this free discounted cashflow valuation of BlueScope Steel.
The good news is that BlueScope Steel 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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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.