The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Lovisa Holdings (ASX:LOV). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.
How Fast Is Lovisa Holdings Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. That makes EPS growth an attractive quality for any company. Over the last three years, Lovisa Holdings has grown EPS by 16% per year. That growth rate is fairly good, assuming the company can keep it up.
It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. The good news is that Lovisa Holdings is growing revenues, and EBIT margins improved by 6.9 percentage points to 18%, over the last year. That's great to see, on both counts.
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.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Lovisa Holdings' forecast profits?
Are Lovisa Holdings Insiders Aligned With All Shareholders?
It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
It's pleasing to note that insiders spent AU$1.4m buying Lovisa Holdings shares, over the last year, without reporting any share sales whatsoever. Knowing this, Lovisa Holdings will have have all eyes on them in anticipation for the what could happen in the near future. We also note that it was the CEO & Director, Victor Herrero, who made the biggest single acquisition, paying AU$998k for shares at about AU$20.03 each.
On top of the insider buying, we can also see that Lovisa Holdings insiders own a large chunk of the company. In fact, they own 43% of the shares, making insiders a very influential shareholder group. Those who are comforted by solid insider ownership like this should be happy, as it implies that those running the business are genuinely motivated to create shareholder value. And their holding is extremely valuable at the current share price, totalling AU$1.0b. That level of investment from insiders is nothing to sneeze at.
Should You Add Lovisa Holdings To Your Watchlist?
One important encouraging feature of Lovisa Holdings is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. These factors alone make the company an interesting prospect for your watchlist, as well as continuing research. You should always think about risks though. Case in point, we've spotted 1 warning sign for Lovisa Holdings you should be aware of.
The good news is that Lovisa Holdings 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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