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 contrast to all that, I prefer to spend time on companies like China Renaissance Holdings (HKG:1911), 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. 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.
China Renaissance Holdings's Improving Profits
In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. It is therefore awe-striking that China Renaissance Holdings's EPS went from CN¥0.50 to CN¥2.11 in just one year. When you see earnings grow that quickly, it often means good things ahead for the company. Could this be a sign that the business has reached an inflection point?
One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. I note that China Renaissance Holdings's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. China Renaissance Holdings maintained stable EBIT margins over the last year, all while growing revenue 68% to CN¥2.7b. That's progress.
In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.
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 China Renaissance Holdings.
Are China Renaissance Holdings 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. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
Even though there was some insider selling over the last year, that was outweighed by Chairman & CEO Fan Bao's huge outlay of CN¥51m, spent buying shares. We should note the average purchase price was around CN¥21.94. Big purchases like that are well worth noting, especially for those who like to follow the insider money.
On top of the insider buying, it's good to see that China Renaissance Holdings insiders have a valuable investment in the business. To be specific, they have CN¥383m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that's only about 3.4% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
Does China Renaissance Holdings Deserve A Spot On Your Watchlist?
China Renaissance Holdings's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The cherry on top is that insiders own a bunch of shares, and one has been buying more. Because of the potential that it has reached an inflection point, I'd suggest China Renaissance Holdings belongs on the top of your watchlist. It is worth noting though that we have found 4 warning signs for China Renaissance Holdings (1 shouldn't be ignored!) that you need to take into consideration.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of China Renaissance Holdings, 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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