Some stocks are best avoided. We don’t wish catastrophic capital loss on anyone. For example, we sympathize with anyone who was caught holding Bankia, S.A. (BME:BKIA) during the five years that saw its share price drop a whopping 83%. We also note that the stock has performed poorly over the last year, with the share price down 65%. Furthermore, it’s down 50% in about a quarter. That’s not much fun for holders. However, one could argue that the price has been influenced by the general market, which is down 23% in the same timeframe.
While a drop like that is definitely a body blow, money isn’t as important as health and happiness.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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.
Looking back five years, both Bankia’s share price and EPS declined; the latter at a rate of 13% per year. This reduction in EPS is less than the 30% annual reduction in the share price. This implies that the market is more cautious about the business these days. The low P/E ratio of 6.40 further reflects this reticence.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Bankia’s TSR for the last 5 years was -79%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
While the broader market lost about 20% in the twelve months, Bankia shareholders did even worse, losing 62% (even including dividends) . 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. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 27% per year over five years. We realise that Baron Rothschild has said investors should “buy when there is blood on the streets”, but we caution that investors should first be sure they are buying a high quality business. 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 risks, for instance. Every company has them, and we’ve spotted 4 warning signs for Bankia you should know about.
If you would prefer to check out another company — one with potentially superior financials — then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on ES 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.