If you want to compound wealth in the stock market, you can do so by buying an index fund. But in our experience, buying the right stocks can give your wealth a significant boost. For example, the Steamships Trading Company Limited (ASX:SST) share price is 45% higher than it was five years ago, which is more than the market average. Zooming in, the stock is actually down 0.7% in the last year.
So let’s investigate and see if the longer term performance of the company has been in line with the underlying business’ progress.
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To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During five years of share price growth, Steamships Trading actually saw its EPS drop 1.7% per year.
So it’s hard to argue that the earnings per share are the best metric to judge the company, as it may not be optimized for profits at this point. Since the change in EPS doesn’t seem to correlate with the change in share price, it’s worth taking a look at other metrics.
We doubt the modest 1.9% dividend yield is attracting many buyers to the stock. In contrast revenue growth of 5.9% per year is probably viewed as evidence that Steamships Trading is growing, a real positive. It’s quite possible that management are prioritizing revenue growth over EPS growth at the moment.
The company’s revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
If you are thinking of buying or selling Steamships Trading stock, you should check out this FREE detailed report on its balance sheet.
It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Steamships Trading’s TSR for the last 5 years was 72%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
Steamships Trading shareholders are up 1.2% for the year (even including dividends). Unfortunately this falls short of the market return. It’s probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 11% over five years. It’s quite possible the business continues to execute with prowess, even as the share price gains are slowing. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Even so, be aware that Steamships Trading is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious…