It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.
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 WAM Strategic Value (ASX:WAR). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.
Even with very modest growth rates, a company will usually do well if it improves earnings per share (EPS) year after year. So it's no surprise that some investors are more inclined to invest in profitable businesses. It is awe-striking that WAM Strategic Value's EPS went from AU$0.005 to AU$0.085 in just one year. Even though that growth rate may not be repeated, that looks like a breakout improvement. Could this be a sign that the business has reached an inflection point?
Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. It's noted that WAM Strategic Value's revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. On the revenue front, WAM Strategic Value has done well over the past year, growing revenue by 660% to AU$23m but EBIT margin figures were less stellar, seeing a decline over the last 12 months. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
ASX:WAR Earnings and Revenue History July 25th 2024
WAM Strategic Value isn't a huge company, given its market capitalisation of AU$196m. That makes it extra important to check on its balance sheet strength.
Are WAM Strategic Value 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. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
Belief in the company remains high for insiders as there hasn't been a single share sold by the management or company board members. But the bigger deal is that the Non-Independent Chairman & Chief Investment Officer, Geoffrey Wilson, paid AU$169k to buy shares at an average price of AU$1.06. It seems at least one insider has seen potential in the company's future - and they're willing to put money on the line.
Recent insider purchases of WAM Strategic Value stock is not the only way management has kept the interests of the general public shareholders in mind. Namely, WAM Strategic Value has a very reasonable level of CEO pay. For companies with market capitalisations under AU$306m, like WAM Strategic Value, the median CEO pay is around AU$450k.
The CEO of WAM Strategic Value was paid just AU$10k in total compensation for the year ending June 2023. This total may indicate that the CEO is sacrificing take home pay for performance-based benefits, ensuring that their motivations are synonymous with strong company results. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add WAM Strategic Value To Your Watchlist?
WAM Strategic Value's earnings have taken off in quite an impressive fashion. Better yet, we can observe insider buying and the chief executive pay looks reasonable. It could be that WAM Strategic Value is at an inflection point, given the EPS growth. If these have piqued your interest, then this stock surely warrants a spot on your watchlist. It is worth noting though that we have found 2 warning signs for WAM Strategic Value (1 can't be ignored!) that you need to take into consideration.
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.
