When we invest, we’re generally looking for stocks that outperform the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, long term Downer EDI Limited (ASX:DOW) shareholders have enjoyed a 75% share price rise over the last half decade, well in excess of the market return of around 47% (not including dividends). On the other hand, the more recent gains haven’t been so impressive, with shareholders gaining just 36%, including dividends.
The past week has proven to be lucrative for Downer EDI investors, so let’s see if fundamentals drove the company’s five-year performance.
Trump has pledged to “unleash” American oil and gas and these 15 US stocks have developments that are poised to benefit.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
During the five years of share price growth, Downer EDI moved from a loss to profitability. That would generally be considered a positive, so we’d hope to see the share price to rise.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Downer EDI’s TSR for the last 5 years was 110%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
We’re pleased to report that Downer EDI shareholders have received a total shareholder return of 36% over one year. That’s including the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 16% per year), it would seem that the stock’s performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. 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. Consider for instance, the ever-present spectre of investment risk. We’ve identified 2 warning signs with Downer EDI , and understanding them should be part of your investment process.