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.
But as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Select Bancorp (NASDAQ:SLCT).
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.
In comparison, loss making companies act like a sponge for capital – but unlike such a sponge they do not always produce something when squeezed.
Select Bancorp’s Earnings Per Share Are Growing.
As one of my mentors once told me, share price follows earnings per share (EPS).
It’s no surprise, then, that I like to invest in companies with EPS growth.
Select Bancorp managed to grow EPS by 16% per year, over three years.
That’s a pretty good rate, if the company can sustain it.
One way to double-check a company’s growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing.
I note that Select Bancorp’s revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins.
Select Bancorp maintained stable EBIT margins over the last year, all while growing revenue 44% to US$52m.
That’s a real positive.
In the chart below, you can see how the company has grown earnings, and revenue, over time.
For finer detail, click on the image.
Select Bancorp isn’t a huge company, given its market capitalization of US$233m. That makes it extra important to check on its balance sheet strength.
Are Select Bancorp 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.
However, small purchases are not always indicative of conviction, and insiders don’t always get it right.
While Select Bancorp insiders did net -US$145.4k selling stock over the last year, they invested US$783k, a much higher figure.
You could argue that level of buying implies genuine confidence in the business.
Zooming in, we can see that the biggest insider purchase was by Director Oscar Harris for US$130k worth of shares, at about US$12.00 per share.
Along with the insider buying, another encouraging sign for Select Bancorp is that insiders, as a group, have a considerable shareholding.
Indeed, they hold US$32m worth of its stock.
That shows significant buy-in, and may indicate conviction in the business strategy.
Those holdings account for over 14% 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, Bill Hedgepeth, is paid less than the median for similar sized companies.
For companies with market capitalizations between US$100m and US$400m, like Select Bancorp, the median CEO pay is around US$1.0m.
The Select Bancorp CEO received total compensation of just US$462k in the year to December 2018.
That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders.
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 good governance, more generally.
Should You Add Select Bancorp To Your Watchlist?
One important encouraging feature of Select Bancorp is that it is growing profits.
On top of that, we’ve seen insiders buying shares even though they already own plenty.
That makes the company a prime candidate for my watchlist – and arguably a research priority.
While we’ve looked at the quality of the earnings, we haven’t yet done any work to value the stock. So if you like to buy cheap, you may want to check if Select Bancorp is trading on a high P/E or a low P/E, relative to its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Select Bancorp, you’ll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
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