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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in China Water Affairs Group (HKG:855). 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.
How Quickly Is China Water Affairs Group 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 makes EPS growth an attractive quality for any company. It certainly is nice to see that China Water Affairs Group has managed to grow EPS by 28% per year 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). China Water Affairs Group maintained stable EBIT margins over the last year, all while growing revenue 9.5% to HK$8.3b. That’s a real positive.
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 Water Affairs Group.
Are China Water Affairs Group Insiders Aligned With All Shareholders?
Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. 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.
China Water Affairs Group top brass are certainly in sync, not having sold any shares, over the last year. But my excitement comes from the HK$715k that Executive Director Zhong Li spent buying shares (at an average price of about HK$7.14).
Along with the insider buying, another encouraging sign for China Water Affairs Group is that insiders, as a group, have a considerable shareholding. Indeed, they have a glittering mountain of wealth invested in it, currently valued at HK$3.3b. That equates to 34% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.
Is China Water Affairs Group Worth Keeping An Eye On?
You can’t deny that China Water Affairs Group has grown its earnings per share at a very impressive rate. That’s attractive. Better still, insiders own a large chunk of the company and one has even been buying more shares. So it’s fair to say I think this stock may well deserve a spot on your watchlist. Of course, just because China Water Affairs Group 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.
As a growth investor I do like to see insider buying. But China Water Affairs Group isn’t the only one. You can see a a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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