Does Capital Appreciation (JSE:CTA) Deserve A Spot On Your Watchlist?

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 Capital Appreciation (JSE:CTA). 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.

See our latest analysis for Capital Appreciation

How Quickly Is Capital Appreciation Increasing Earnings Per Share?

As one of my mentors once told me, share price follows earnings per share (EPS). That makes EPS growth an attractive quality for any company. Impressively, Capital Appreciation has grown EPS by 34% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

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. While we note Capital Appreciation's EBIT margins were flat over the last year, revenue grew by a solid 29% to R743m. That's progress.

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.

Since Capital Appreciation is no giant, with a market capitalization of R1.3b, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Capital Appreciation 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. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

It's good to see Capital Appreciation insiders walking the walk, by spending R8.4m on shares in just twelve months. When you contrast that with the complete lack of sales, it's easy for shareholders to brim with joyful expectancy. It is also worth noting that it was Joint CEO & Executive Director Michael Pimstein who made the biggest single purchase, worth R2.7m, paying R0.94 per share.

Along with the insider buying, another encouraging sign for Capital Appreciation is that insiders, as a group, have a considerable shareholding. Indeed, they hold R202m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. That amounts to 15% of the company, demonstrating a degree of high-level alignment with shareholders.

While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Michael Pimstein is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations under R3.0b, like Capital Appreciation, the median CEO pay is around R4.6m.

The Capital Appreciation CEO received total compensation of just R1.8m 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. It can also be a sign of a culture of integrity, in a broader sense.

Does Capital Appreciation Deserve A Spot On Your Watchlist?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Capital Appreciation's strong EPS growth. Not only that, but we can see that insiders both own a lot of, and are buying more, shares in the company. So it's fair to say I think this stock may well deserve a spot on your watchlist. You should always think about risks though. Case in point, we've spotted 2 warning signs for Capital Appreciation you should be aware of.

The good news is that Capital Appreciation 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. 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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