Stock Analysis

Here's Why I Think Great-West Lifeco (TSE:GWO) Is An Interesting Stock

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TSX:GWO
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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 Great-West Lifeco (TSE:GWO). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

See our latest analysis for Great-West Lifeco

How Quickly Is Great-West Lifeco Increasing Earnings Per Share?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. We can see that in the last three years Great-West Lifeco grew its EPS by 9.6% 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). 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 16% to CA$63b. That's progress.

The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.

earnings-and-revenue-history
TSX:GWO Earnings and Revenue History December 17th 2021

While we live in the present moment at all times, there's no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, 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. 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.

While Great-West Lifeco insiders did net -CA$2.8m selling stock over the last year, they invested CA$3.8m, a much higher figure. You could argue that level of buying implies genuine confidence in the business. It is also worth noting that it was President Paul Mahon who made the biggest single purchase, worth CA$1.8m, paying CA$27.16 per share.

The good news, alongside the insider buying, for Great-West Lifeco bulls is that insiders (collectively) have a meaningful investment in the stock. To be specific, they have CA$31m worth of shares. That's a lot of money, and no small incentive to work hard. 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. To me, that all makes it well worth a spot on your watchlist, as well as continuing research. Of course, just because Great-West Lifeco 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.

The good news is that Great-West Lifeco 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.

Valuation is complex, but we're helping make it simple.

Find out whether Great-West Lifeco is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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