Here's Why We Think Red Violet (NASDAQ:RDVT) Is Well Worth Watching
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Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' 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 Red Violet (NASDAQ:RDVT). 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.
Check out our latest analysis for Red Violet
Red Violet's Improving Profits
In business, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS) performance. Which is why EPS growth is looked upon so favourably. It is awe-striking that Red Violet's EPS went from US$0.20 to US$1.15 in just one year. While it's difficult to sustain growth at that level, it bodes well for the company's outlook for the future. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.
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. The music to the ears of Red Violet shareholders is that EBIT margins have grown from 3.3% to 8.8% in the last 12 months and revenues are on an upwards trend as well. Ticking those two boxes is a good sign of growth, in our book.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are Red Violet 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. Because often, 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.
With strong conviction, Red Violet insiders have stood united by refusing to sell shares over the last year. But the bigger deal is that the Independent Director, William Livek, paid US$90k to buy shares at an average price of US$18.40. It seems at least one insider has seen potential in the company's future - and they're willing to put money on the line.