Should You Be Adding American Homes 4 Rent (NYSE:AMH) To Your Watchlist Today?

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. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like American Homes 4 Rent (NYSE:AMH). 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.

Check out our latest analysis for American Homes 4 Rent

How Fast Is American Homes 4 Rent Growing?

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. I, for one, am blown away by the fact that American Homes 4 Rent has grown EPS by 56% per year, over the last three years. Growth that fast may well be fleeting, but like a lotus blooming from a murky pond, it sparks joy for the wary stock pickers.

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. American Homes 4 Rent maintained stable EBIT margins over the last year, all while growing revenue 7.9% to US$1.2b. That's a real positive.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

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 American Homes 4 Rent.

Are American Homes 4 Rent 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.

Even though there was some insider selling over the last year, that was outweighed by B. Hughes's huge outlay of US$12m, spent buying shares. We should note the average purchase price was around US$30.14. Big purchases like that are well worth noting, especially for those who like to follow the insider money.

Along with the insider buying, another encouraging sign for American Homes 4 Rent is that insiders, as a group, have a considerable shareholding. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$1.1b. This suggests to me that leadership will be very mindful of shareholders' interests when making decisions!

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That's because on our analysis the CEO, David Singelyn, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like American Homes 4 Rent, with market caps over US$8.0b, is about US$11m.

The American Homes 4 Rent CEO received total compensation of just US$3.3m in the year to . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. I'd also argue reasonable pay levels attest to good decision making more generally.

Should You Add American Homes 4 Rent To Your Watchlist?

American Homes 4 Rent's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The incing on the cake is that insiders own a large chunk of the company and one has even been buying more shares. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe American Homes 4 Rent deserves timely attention. You should always think about risks though. Case in point, we've spotted 3 warning signs for American Homes 4 Rent you should be aware of, and 1 of them makes us a bit uncomfortable.

The good news is that American Homes 4 Rent 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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