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Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, long term ARB Corporation Limited (ASX:ARB) shareholders have enjoyed a 51% share price rise over the last half decade, well in excess of the market return of around 15% (not including dividends).
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 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.
Over half a decade, ARB managed to grow its earnings per share at 3.8% a year. This EPS growth is slower than the share price growth of 8.6% per year, over the same period. So it’s fair to assume the market has a higher opinion of the business than it did five years ago. And that’s hardly shocking given the track record of growth.
We’re pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Dive deeper into the earnings by checking this interactive graph of ARB’s earnings, revenue and cash flow.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, ARB’s TSR for the last 5 years was 81%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Investors in ARB had a tough year, with a total loss of 18% (including dividends), against a market gain of about 12%. 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 13% 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. Before spending more time on ARB it might be wise to click here to see if insiders have been buying or selling shares.
Of course ARB 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 AU exchanges.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.