When we invest, we’re generally looking for stocks that outperform the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the carsales.com Ltd (ASX:CAR) share price is up 25% in the last 5 years, clearly besting than the market return of around 9.9% (ignoring dividends). On the other hand, the more recent gains haven’t been so impressive, with shareholders gaining just 2.2%, including dividends.
To quote Buffett, ‘Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace…’ 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 five years of share price growth, carsales.com achieved compound earnings per share (EPS) growth of 8.1% per year. This EPS growth is higher than the 4.6% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company.
We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. It might be well worthwhile taking a look at our free report on carsales.com’s earnings, revenue and cash flow.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, carsales.com’s TSR for the last 5 years was 48%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
carsales.com shareholders gained a total return of 2.2% during the year. Unfortunately this falls short of the market return. It’s probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 8.1% over five years. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. Investors who like to make money usually check up on insider purchases, such as the price paid, and total amount bought. You can find out about the insider purchases of carsales.com by clicking this link.
carsales.com is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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. Thank you for reading.