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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 Fronsac Real Estate Investment Trust (CVE:FRO.UN). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
Fronsac Real Estate Investment Trust's Improving Profits
Even with very modest growth rates, a company will usually do well if it improves earnings per share (EPS) year after year. So EPS growth can certainly encourage an investor to take note of a stock. Like the last firework on New Year's Eve accelerating into the sky, Fronsac Real Estate Investment Trust's EPS shot from CA$0.37 to CA$0.66, over the last year. You don't see 78% year-on-year growth like that, very often. That could be a sign that the business has reached a true inflection point.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). Not all of Fronsac Real Estate Investment Trust's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. The good news is that Fronsac Real Estate Investment Trust is growing revenues, and EBIT margins improved by 8.8 percentage points to 75%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.
Fronsac Real Estate Investment Trust isn't a huge company, given its market capitalization of CA$122m. That makes it extra important to check on its balance sheet strength.
Are Fronsac Real Estate Investment Trust Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. 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.
The good news is that Fronsac Real Estate Investment Trust insiders spent a whopping CA$1.4m on stock in just one year, and I didn't see any selling. And so I find myself almost expectant, and certainly hopeful, that this large outlay signals prescient optimism for the business. We also note that it was the Independent Trustee, Guy Laframboise, who made the biggest single acquisition, paying CA$460k for shares at about CA$6.50 each.
The good news, alongside the insider buying, for Fronsac Real Estate Investment Trust bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold CA$19m worth of its stock. That's a lot of money, and no small incentive to work hard. Those holdings account for over 15% of the company; visible skin in the game.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Jason Parravano, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Fronsac Real Estate Investment Trust with market caps under CA$253m is about CA$189k.
Fronsac Real Estate Investment Trust offered total compensation worth CA$154k to its CEO in the year to . That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Is Fronsac Real Estate Investment Trust Worth Keeping An Eye On?
Fronsac Real Estate Investment Trust's earnings per share have taken off like a rocket aimed right at the moon. Just as heartening; insiders both own and are buying more stock. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Fronsac Real Estate Investment Trust deserves timely attention. We don't want to rain on the parade too much, but we did also find 4 warning signs for Fronsac Real Estate Investment Trust (1 shouldn't be ignored!) that you need to be mindful of.
The good news is that Fronsac Real Estate Investment Trust 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.
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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