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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. 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.
So if you’re like me, you might be more interested in profitable, growing companies, like Hour Glass (SGX:AGS). 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. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Fast Is Hour Glass Growing Its Earnings Per Share?
Even with very modest growth rates, a company will usually do well if it improves earnings per share (EPS) year after year. So it’s no surprise that some investors are more inclined to invest in profitable businesses. Like a wedge-tailed eagle on the wind, Hour Glass’s EPS soared from S$0.072 to S$0.091, in just one year. That’s a commendable gain of 26%.
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. This approach makes Hour Glass look pretty good, on balance; although revenue is flattish, EBIT margins improved from 8.2% to 11% in the last year. That’s a real positive.
In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are Hour Glass Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don’t know the exact thinking behind their acquisitions.
One shining light for Hour Glass is the serious outlay one insider has made to buy shares, in the last year. In one fell swoop, Co-Founder & Executive Chairman Yun Tay, spent S$8.5m, at a price of S$0.66 per share. It doesn’t get much better than that, in terms of large investments from insiders.
On top of the insider buying, it’s good to see that Hour Glass insiders have a valuable investment in the business. With a whopping S$80m worth of shares as a group, insiders have plenty riding on the company’s success. At 15% of the company, the co-investment by insiders gives me confidence that management will make long-term focussed decisions.
Should You Add Hour Glass To Your Watchlist?
You can’t deny that Hour Glass 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. While we’ve looked at the quality of the earnings, we haven’t yet done any work to value the stock. So if you like to buy cheap, you may want to check if Hour Glass is trading on a high P/E or a low P/E, relative to its industry.
The good news is that Hour Glass is not the only growth stock with insider buying. Here’s a 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
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.