You can invest in an index fund if you want to make sure your returns approximately match the overall market. By comparison, an individual stock is unlikely to match market returns – and could well fall short. Unfortunately for investors in Redrow plc (LON:RDW), the share price has slipped 22% in three years, falling short of the marketdecline of 8.0%. The share price has dropped 44% in three months.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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).
Although the share price is down over three years, Redrow actually managed to grow EPS by 9.1% per year in that time. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Or else the company was over-hyped in the past, and so its growth has disappointed.
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.
Revenue is actually up 10% over the three years, so the share price drop doesn’t seem to hinge on revenue, either. This analysis is just perfunctory, but it might be worth researching Redrow more closely, as sometimes stocks fall unfairly. This could present an opportunity.
The company’s revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Redrow is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for Redrow in this interactive graph of future profit estimates.
What about the Total Shareholder Return (TSR)?
We’ve already covered Redrow’s share price action, but we should also mention its total shareholder return (TSR). 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. Redrow’s TSR of was a loss of 8.2% for the 3 years. That wasn’t as bad as its share price return, because it has paid dividends.
A Different Perspective
While the broader market lost about 11% in the twelve months, Redrow shareholders did even worse, losing 13%. Having said that, it’s inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Longer term investors wouldn’t be so upset, since they would have made 4.5%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. 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. Case in point: We’ve spotted 1 warning sign for Redrow you should be aware of.
Of course Redrow may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.
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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. Thank you for reading.