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Is Now The Time To Put Arch Capital Group (NASDAQ:ACGL) On Your Watchlist?

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·4-min read
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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 as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Arch Capital Group (NASDAQ:ACGL). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

View our latest analysis for Arch Capital Group

Arch Capital Group's Earnings Per Share Are Growing.

As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Impressively, Arch Capital Group has grown EPS by 25% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). I note that Arch Capital Group's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Unfortunately, revenue is down and so are margins. That is, not a hint of euphemism here, suboptimal.

The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.

earnings-and-revenue-history
earnings-and-revenue-history

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Arch Capital Group's forecast profits?

Are Arch Capital 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. Because oftentimes, 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.

Even though there was some insider selling over the last year, that was outweighed by Independent Chairman of the Board John Pasquesi's huge outlay of US$20m, spent buying shares. The average price paid was about US$41.23. The quantum of that insider purchase is both rare and a sight to behold, not unlike an endangered Amur Leopard in the wild.

Along with the insider buying, another encouraging sign for Arch Capital Group is that insiders, as a group, have a considerable shareholding. Notably, they have an enormous stake in the company, worth US$592m. I would find that kind of skin in the game quite encouraging, if I owned shares, since it would ensure that the leaders of the company would also experience my success, or failure, with the stock.

While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Marc Grandisson is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations over US$8.0b, like Arch Capital Group, the median CEO pay is around US$13m.

Arch Capital Group offered total compensation worth US$9.3m to its CEO in the year to . That seems pretty reasonable, especially given its below the median for similar sized companies. While the level of CEO compensation isn't a huge factor in my view of the company, 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.

Is Arch Capital Group Worth Keeping An Eye On?

You can't deny that Arch Capital Group has grown its earnings per share at a very impressive rate. That's attractive. Better still, insiders own a large chunk of the company and one has even been buying more shares. So it's fair to say I think this stock may well deserve a spot on your watchlist. What about risks? Every company has them, and we've spotted 1 warning sign for Arch Capital Group you should know about.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Arch Capital Group, you'll probably love this free list of growing companies that insiders are buying.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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