Here's Why I Think Capital Appreciation (JSE:CTA) Is An Interesting Stock

For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and 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). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

See our latest analysis for Capital Appreciation

How Quickly Is Capital Appreciation Increasing Earnings Per Share?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. It's no surprise, then, that I like to invest in companies with EPS growth. It certainly is nice to see that Capital Appreciation has managed to grow EPS by 34% per year over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

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.

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.

Capital Appreciation isn't a huge company, given its market capitalization of R1.3b. That makes it extra important to check on its balance sheet strength.

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. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. 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 R9.5m 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. We also note that it was the CFO & Executive Director, Alan Salomon, who made the biggest single acquisition, paying R2.7m for shares at about R0.94 each.

The good news, alongside the insider buying, for Capital Appreciation bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold R194m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Those holdings account for over 15% of the company; visible skin in the game.

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, Michael Pimstein, is paid less than the median for similar sized companies. For companies with market capitalizations under R2.9b, like Capital Appreciation, the median CEO pay is around R4.1m.

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. 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 good governance, more generally.

Is Capital Appreciation Worth Keeping An Eye On?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Capital Appreciation's strong EPS growth. On top of that, insiders own a significant stake in the company and have been buying more shares. So it's fair to say I think this stock may well deserve a spot on your watchlist. It is worth noting though that we have found 2 warning signs for Capital Appreciation that you need to take into consideration.

As a growth investor I do like to see insider buying. But Capital Appreciation isn't the only one. You can see a a free list of them here.

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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