It’s only natural that many investors, especially those who are new to the game, prefer to buy shares in ‘sexy’ stocks with a good story, even if those businesses lose money. 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 Water Intelligence (LON:WATR), which has not only revenues, but also profits. 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. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
Check out our latest analysis for Water Intelligence
How Quickly Is Water Intelligence Increasing Earnings Per Share?
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. It’s no surprise, then, that I like to invest in companies with EPS growth. As a tree reaches steadily for the sky, Water Intelligence’s EPS has grown 21% each year, compound, over three years. If the company can sustain that sort of growth, we’d expect shareholders to come away winners.
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). Water Intelligence maintained stable EBIT margins over the last year, all while growing revenue 45% to US$25m. That’s a real positive.
Water Intelligence isn’t a huge company, given its market capitalization of US$47m. That makes it extra important to check on its balance sheet strength.
Are Water Intelligence 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. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don’t know the exact thinking behind their acquisitions.
Not only did Water Intelligence insiders refrain from selling stock during the year, but they also spent US$108k buying it. That puts the company in a nice light, as it makes me think its leaders are feeling confident. Zooming in, we can see that the biggest insider purchase was by Independent Non-executive Director Laura Hills for UK£92k worth of shares, at about UK£3.70 per share.
Along with the insider buying, another encouraging sign for Water Intelligence is that insiders, as a group, have a considerable shareholding. To be specific, they have US$12m worth of shares. That’s a lot of money, and no small incentive to work hard. Those holdings account for over 26% of the company; visible skin in the game.
Does Water Intelligence Deserve A Spot On Your Watchlist?
You can’t deny that Water Intelligence has grown its earnings per share at a very impressive rate. That’s attractive. On top of that, insiders own a significant stake in the company and have been buying more shares. So it’s fair to say I think this stock may well deserve a spot on your watchlist. Now, you could try to make up your mind on Water Intelligence by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Water Intelligence, 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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.