By buying an index fund, investors can approximate the average market return. But many of us dare to dream of bigger returns, and build a portfolio ourselves. Just take a look at Stride Stapled Group (NZSE:SPG), which is up 36%, over three years, soundly beating the market return of 26% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 1.5% , including dividends .
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During the three years of share price growth, Stride Stapled Group actually saw its earnings per share (EPS) drop 22% per year.
This means it's unlikely the market is judging the company based on earnings growth. Given this situation, it makes sense to look at other metrics too.
The dividend is no better now than it was three years ago, so that is unlikely to have driven the share price higher. It's much more likely that the fact that Stride Stapled Group has been growing revenue at 4.6% a year is seen as a genuine positive. It could be that investors are content with the revenue growth on the basis that the company isn't really focussed on profits just yet. And that might explain the higher price.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
Balance sheet strength is crucial. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Stride Stapled Group the TSR over the last 3 years was 61%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Stride Stapled Group produced a TSR of 1.5% over the last year. While you don't go broke making a profit, this return was actually lower than the average market return of about 10%. But the (superior) three-year TSR of 17% per year is some consolation. We prefer focus on longer term returns, as they are usually a more meaningful indication of the underlying business. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For instance, we've identified 3 warning signs for Stride Stapled Group (1 is concerning) that you should be aware of.
But note: Stride Stapled Group may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on NZ exchanges.
This article by Simply Wall St is general in nature. 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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