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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. 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.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Diamond Hill Investment Group (NASDAQ:DHIL). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
How Quickly Is Diamond Hill Investment Group Increasing Earnings Per Share?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. We can see that in the last three years Diamond Hill Investment Group grew its EPS by 13% per year. That growth rate is fairly good, assuming the company can keep it up.
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. Diamond Hill Investment Group maintained stable EBIT margins over the last year, all while growing revenue 37% to US$174m. That's progress.
You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.
While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Diamond Hill Investment Group's balance sheet strength, before getting too excited.
Are Diamond Hill Investment Group Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. 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.
Despite -US$266k worth of sales, Diamond Hill Investment Group insiders have overwhelmingly been buying the stock, spending US$513k on purchases in the last twelve months. On balance, to me, this signals their optimism. Zooming in, we can see that the biggest insider purchase was by Chairman of the Board & Lead Independent Director James Laird for US$290k worth of shares, at about US$145 per share.
On top of the insider buying, it's good to see that Diamond Hill Investment Group insiders have a valuable investment in the business. Indeed, they hold US$24m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 3.5% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
Is Diamond Hill Investment Group Worth Keeping An Eye On?
As I already mentioned, Diamond Hill Investment Group is a growing business, which is what I like to see. Better yet, insiders are significant shareholders, and have been buying more shares. To me, that all makes it well worth a spot on your watchlist, as well as continuing research. However, before you get too excited we've discovered 2 warning signs for Diamond Hill Investment Group (1 is a bit concerning!) that you should be aware of.
As a growth investor I do like to see insider buying. But Diamond Hill Investment Group isn't the only one. You can see a a free list of them here.
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. 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.
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