For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and 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 Great-West Lifeco (TSE:GWO). 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. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
How Fast Is Great-West Lifeco Growing?
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. Great-West Lifeco managed to grow EPS by 15% per year, over three years. That's a good rate of growth, if it can be sustained.
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. Not all of Great-West Lifeco's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. While we note Great-West Lifeco's EBIT margins were flat over the last year, revenue grew by a solid 64% to CA$63b. That's progress.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
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 Great-West Lifeco.
Are Great-West Lifeco 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. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
While Great-West Lifeco insiders did net -CA$2.8m selling stock over the last year, they invested CA$3.4m, a much higher figure. On balance, to me, this signals their optimism. We also note that it was the President, Paul Mahon, who made the biggest single acquisition, paying CA$1.8m for shares at about CA$27.16 each.
Along with the insider buying, another encouraging sign for Great-West Lifeco is that insiders, as a group, have a considerable shareholding. Indeed, they hold CA$31m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 0.09% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
Is Great-West Lifeco Worth Keeping An Eye On?
One positive for Great-West Lifeco is that it is growing EPS. That's nice to see. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for my watchlist - and arguably a research priority. You still need to take note of risks, for example - Great-West Lifeco has 1 warning sign we think you should be aware of.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Great-West Lifeco, 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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Great-West Lifeco Inc., a financial services holding company, engages in the life and health insurance, retirement and investment services, asset management, and reinsurance businesses in Canada, the United States, and Europe.
Established dividend payer and good value.