Investors can approximate the average market return by buying an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. For example, the Lear Corporation (NYSE:LEA) share price is down 18% in the last year. That falls noticeably short of the market return of around 23%. At least the damage isn’t so bad if you look at the last three years, since the stock is down 14% in that time. Even worse, it’s down 11% in about a month, which isn’t fun at all. Importantly, this could be a market reaction to the recently released financial results. You can check out the latest numbers in our company report.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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.
Unhappily, Lear had to report a 26% decline in EPS over the last year. The share price fall of 18% isn’t as bad as the reduction in earnings per share. It may have been that the weak EPS was not as bad as some had feared.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
It might be well worthwhile taking a look at our free report on Lear’s earnings, revenue and cash flow.
What about the Total Shareholder Return (TSR)?
We’ve already covered Lear’s share price action, but we should also mention its total shareholder return (TSR). Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. Its history of dividend payouts mean that Lear’s TSR, which was a 16% drop over the last year, was not as bad as the share price return.
A Different Perspective
Investors in Lear had a tough year, with a total loss of 16% (including dividends) , against a market gain of about 23%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 3.8% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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. Take risks, for example – Lear has 2 warning signs we think you should be aware of.
We will like Lear better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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