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 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.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Acorn International (NYSE:ATV). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
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Acorn International’s Improving Profits
In the last three years Acorn International’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 a firecracker arcing through the night sky, Acorn International’s EPS shot from US$4.82 to US$12.32, over the last year. You don’t see 156% year-on-year growth like that, very often.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. The good news is that Acorn International is growing revenues, and EBIT margins improved by 30.4 percentage points to 11%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
The chart below shows how the company’s bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
Acorn International isn’t a huge company, given its market capitalization of US$65m. That makes it extra important to check on its balance sheet strength.
Are Acorn International Insiders Aligned With All Shareholders?
Many consider high insider ownership to be a strong sign of alignment between the leaders of a company and the ordinary shareholders. So as you can imagine, the fact that Acorn International insiders own a significant number of shares certainly appeals to me. Actually, with 39% of the company to their names, insiders are profoundly invested in the business. I’m reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. With that sort of holding, insiders have about US$25m riding on the stock, at current prices. That should be more than enough to keep them focussed on creating shareholder value!
Does Acorn International Deserve A Spot On Your Watchlist?
Acorn International’s earnings have taken off like any random crypto-currency did, back in 2017. That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company. At times fast EPS growth is a sign the business has reached an inflection point; and I do like those. So to my mind Acorn International is worth putting on your watchlist; after all, shareholders do well when the market underestimates fast growing companies. Another important measure of business quality not discussed here, is return on equity (ROE). Click on this link to see how Acorn International shapes up to industry peers, when it comes to ROE.
You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies 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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