For newbies, it might seem like a good idea (and an exciting prospect) to buy a business that tells investors a good story, even if it lacks a history of revenue and profit altogether. Unfortunately, high-risk investments are often unlikely to pay off, and many investors pay a price to learn their lesson.
Contrary to all this, I prefer to spend time on companies like Hovnan companies (NYSE: HOV), which not only has revenue, but also profits. While that doesn’t make stocks worth buying at all costs, you can’t deny that successful capitalism ultimately requires profits. Conversely, a loss-making company has yet to prove itself with profit, and eventually the sweet milk of external capital can turn sour.
How fast is Hovnanian Enterprises increasing its earnings per share?
In business, but not in life, profit is a key measure of success; and stock prices tend to reflect earnings per share (EPS). So like the hint of a smile on a face I love, growing EPS usually makes me look twice. So you can imagine that it almost knocked me out when I realized that Hovnanian Enterprises had increased their EPS from US $ 1.24 to US $ 86.02, in a short year. When you see profits growing so quickly, it often means good things ahead for the business.
I like to see revenue growth as an indication that growth is sustainable, and I look for a high profit margin before interest and taxes (EBIT) to indicate a competitive gap (although some low-margin companies also have ditches). Not all Hovnanian Enterprises income this year is income operations, so keep in mind that the revenue and margin numbers I used might not be the best representation of the underlying business. The good news is that Hovnanian Enterprises is increasing its revenues and its EBIT margins have improved by 3.5 percentage points to 9.0%, over the past year. It’s great to see, on both counts.
The chart below shows how the company’s bottom line has progressed over time. To see the actual numbers, click on the graph.
NYSE: HOV Revenue and Revenue History October 2, 2021
As profitability drives the upswing, cautious investors check the balance sheet too.
Are Hovnanian Enterprises Insiders Aligned with All Shareholders?
I like that business leaders have some skin in the game, so to speak, because it increases the alignment of incentives between the people who run the business and its real owners. As a result, I am encouraged that insiders own Hovnanian Enterprises shares of considerable value. In particular, they own a huge stake in the company, worth US $ 139 million. This equates to 26% of the company, making insiders powerful and aligned with other shareholders. It may be my imagination, but I feel the glimmer of an opportunity.
Should you add Hovnanian businesses to your watchlist?
Hovnanian Enterprises’ profits took off like any random cryptocurrency, in 2017. This type of growth is simply eye-catching, and the large investment held by insiders certainly informs my view of the business. Sometimes rapid growth in BPA is a sign that the business has reached an inflection point; and I like those. So yes, on this short review, I think it’s worth considering Hovnanian Enterprises for a place on your watch list. However, before you get too excited, we found out 3 warning signs for Hovnanian businesses (2 shouldn’t be ignored!) That you should be aware of.
Of course, you can (sometimes) buy stocks that are not growing income and not have insiders who buy stocks. But as a growth investor, I always like to check out companies that to do have these characteristics. You can access a free list of them here.
Please note that the insider dealing discussed in this article refers to reportable trades in the relevant jurisdiction.
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