The one-year shareholder returns and company earnings persist lower as Harvey Norman Holdings (ASX:HVN) stock falls a further 4.9% in past week

The simplest way to benefit from a rising market is to buy an index fund. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. That downside risk was realized by Harvey Norman Holdings Limited (ASX:HVN) shareholders over the last year, as the share price declined 23%. That's disappointing when you consider the market declined 3.5%. At least the damage isn't so bad if you look at the last three years, since the stock is down 7.0% in that time. Furthermore, it's down 13% in about a quarter. That's not much fun for holders.

Since Harvey Norman Holdings has shed AU$212m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

View our latest analysis for Harvey Norman Holdings

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

Unhappily, Harvey Norman Holdings had to report a 7.9% decline in EPS over the last year. This reduction in EPS is not as bad as the 23% share price fall. This suggests the EPS fall has made some shareholders are more nervous about the business. The P/E ratio of 5.51 also points to the negative market sentiment.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

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, Harvey Norman Holdings' TSR for the last 1 year was -16%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

Harvey Norman Holdings shareholders are down 16% for the year (even including dividends), but the market itself is up 3.5%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 7% 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. 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 for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Harvey Norman Holdings (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

Harvey Norman Holdings 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 Australian exchanges.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.