It’s only natural that many investors, especially those who are new to the game, prefer to buy shares in ‘sexy’ stocks with a good story, even if those businesses lose money. And in their study titled Who Falls Prey to the Wolf of Wall Street?’ Leuz et. al. found that it is ‘quite common’ for investors to lose money by buying into ‘pump and dump’ schemes.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Cenergy Holdings (EBR:CENER). 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. 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.
Cenergy Holdings’s Improving Profits
In the last three years Cenergy Holdings’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. Thus, it makes sense to focus on more recent growth rates, instead. Like the last firework on New Year’s Eve accelerating into the sky, Cenergy Holdings’s EPS shot from €0.065 to €0.13, over the last year. You don’t see 94% year-on-year growth like that, very often.
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. Unfortunately, Cenergy Holdings’s revenue dropped 13% last year, but the silver lining is that EBIT margins improved from 4.4% to 7.0%. That falls short of ideal.
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.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are Cenergy Holdings Insiders Aligned With All Shareholders?
As a general rule, I think it worth considering how much the CEO is paid, since unreasonably high rates could be considered against the interests of shareholders. For companies with market capitalizations between €165m and €660m, like Cenergy Holdings, the median CEO pay is around €326k.
The Cenergy Holdings CEO received €280k in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of good governance, more generally.
Should You Add Cenergy Holdings To Your Watchlist?
Cenergy Holdings’s earnings have taken off like any random crypto-currency did, back in 2017. Such fast EPS growth makes me wonder if the business has hit an inflection point (and I mean the good kind.) At the same time the reasonable CEO compensation reflects well on the board of directors. So Cenergy Holdings looks like it could be a good quality growth stock, at first glance. That’s worth watching. Even so, be aware that Cenergy Holdings is showing 2 warning signs in our investment analysis , and 1 of those is concerning…
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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