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 as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’
In contrast to all that, I prefer to spend time on companies like Vipshop Holdings (NYSE:VIPS), which has not only revenues, but also profits. Now, I’m not saying that the stock is necessarily undervalued today; but I can’t shake an appreciation for the profitability of the business itself. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Fast Is Vipshop Holdings Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. It’s no surprise, then, that I like to invest in companies with EPS growth. As a tree reaches steadily for the sky, Vipshop Holdings’s EPS has grown 20% each year, compound, over three years. If the company can sustain that sort of growth, we’d expect shareholders to come away winners.
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. Not all of Vipshop Holdings’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 Vipshop Holdings is growing revenues, and EBIT margins improved by 2.7 percentage points to 5.4%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
The chart below shows how the company’s bottom and top lines have progressed over time. For finer detail, click on the image.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Vipshop Holdings’s forecast profits?
Are Vipshop Holdings Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$12b company like Vipshop Holdings. But we do take comfort from the fact that they are investors in the company. Notably, they have an enormous stake in the company, worth CN¥2.2b. That equates to 19% of the company, making insiders powerful and aligned with other shareholders. So it might be my imagination, but I do sense the glimmer of an opportunity.
Does Vipshop Holdings Deserve A Spot On Your Watchlist?
For growth investors like me, Vipshop Holdings’s raw rate of earnings growth is a beacon in the night. Further, the high level of insider ownership impresses me, and suggests that I’m not the only one who appreciates the EPS growth. So this is very likely the kind of business that I like to spend time researching, with a view to discerning its true value. We don’t want to rain on the parade too much, but we did also find 1 warning sign for Vipshop Holdings that you need to be mindful of.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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