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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. 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.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in NZME (NZSE:NZM). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. 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.
Check out our latest analysis for NZME
NZME's Earnings Per Share Are Growing.
As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. I, for one, am blown away by the fact that NZME has grown EPS by 43% per year, over the last three years. That sort of growth never lasts long, but like a shooting star it is well worth watching when it happens.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. NZME shareholders can take confidence from the fact that EBIT margins are up from 9.0% to 11%, and revenue is growing. That's great to see, on both counts.
The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.
Since NZME is no giant, with a market capitalization of NZ$346m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are NZME Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
NZME top brass are certainly in sync, not having sold any shares, over the last year. But my excitement comes from the NZ$80k that John Lewis spent buying shares (at an average price of about NZ$0.85).
Is NZME Worth Keeping An Eye On?
NZME's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. Growth investors should find it difficult to look past that strong EPS move. And indeed, it could be a sign that the business is at an inflection point. For me, this situation certainly piques my interest. Even so, be aware that NZME is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...