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. 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.
So if you're like me, you might be more interested in profitable, growing companies, like Donegal Group (NASDAQ:DGIC.A). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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 Donegal Group Growing Its Earnings Per Share?
In the last three years Donegal Group's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. As a result, I'll zoom in on growth over the last year, instead. Like the last firework on New Year's Eve accelerating into the sky, Donegal Group's EPS shot from US$0.97 to US$2.01, over the last year. Year on year growth of 107% is certainly a sight to behold.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. This approach makes Donegal Group look pretty good, on balance; although revenue is flattish, EBIT margins improved from 4.3% to 9.5% in the last year. That's something to smile about.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
Fortunately, we've got access to analyst forecasts of Donegal Group's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Donegal Group 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. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
For the sake of balance, I do note Donegal Group insiders sold -US$5.2k worth of shares last year. But this is outweighed by the Independent Director Jack Hess who spent US$56k buying shares, at an average price of around around US$13.95.
I do like that insiders have been buying shares in Donegal Group, but there is more evidence of shareholder friendly management. I refer to the very reasonable level of CEO pay. I discovered that the median total compensation for the CEOs of companies like Donegal Group with market caps between US$200m and US$800m is about US$1.7m.
The Donegal Group CEO received US$1.3m in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of a culture of integrity, in a broader sense.
Is Donegal Group Worth Keeping An Eye On?
Donegal Group's earnings per share have taken off like a rocket aimed right at the moon. The company can also boast of insider buying, and reasonable remuneration for the CEO. The strong EPS growth suggests Donegal Group may be at an inflection point. For those chasing fast growth, then, I'd suggest to stock merits monitoring. Even so, be aware that Donegal Group is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...
The good news is that Donegal Group 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.
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