Investors Who Bought Cato (NYSE:CATO) Shares Five Years Ago Are Now Down 63%

In order to justify the effort of selecting individual stocks, it’s worth striving to beat the returns from a market index fund. But every investor is virtually certain to have both over-performing and under-performing stocks. At this point some shareholders may be questioning their investment in The Cato Corporation (NYSE:CATO), since the last five years saw the share price fall 63%. The silver lining is that the stock is up 1.5% in about a week.

See our latest analysis for Cato

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 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 over which the share price declined, Cato’s earnings per share (EPS) dropped by 5.6% each year. Readers should note that the share price has fallen faster than the EPS, at a rate of 18% per year, over the period. So it seems the market was too confident about the business, in the past. The low P/E ratio of 11.03 further reflects this reticence.

The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).

NYSE:CATO Past and Future Earnings, February 3rd 2020
NYSE:CATO Past and Future Earnings, February 3rd 2020

This free interactive report on Cato’s earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

What About Dividends?

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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Cato the TSR over the last 5 years was -50%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

Cato provided a TSR of 19% over the year (including dividends) . That’s fairly close to the broader market return. To take a positive view, the gain is pleasing, and it sure beats annualized TSR loss of 13%, which was endured over half a decade. We’re pretty skeptical of turnaround stories, but it’s good to see the recent share price recovery. 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 2 warning signs for Cato you should be aware of, and 1 of them can’t be ignored.

We will like Cato 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 editorial-team@simplywallst.com. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.