Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. Investors in Aareal Bank AG (ETR:ARL) have tasted that bitter downside in the last year, as the share price dropped 29%. That falls noticeably short of the market return of around -7.3%. However, the longer term returns haven’t been so bad, with the stock down 13% in the last three years.
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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 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).
Even though the Aareal Bank share price is down over the year, its EPS actually improved. Of course, the situation might betray previous over-optimism about growth. By glancing at these numbers, we’d posit that the the market had expectations of much higher growth, last year. But looking to other metrics might better explain the share price change.
Vibrant companies don’t usually cut their dividends, so the recent reduction might help explain why the Aareal Bank share price has been weak. On top of that, the revenue fell 6.1% in the last year. That’s virtually bound to encourage selling.
You can see how revenue and earnings have changed over time in the image below, (click on the chart to see cashflow).
If you are thinking of buying or selling Aareal Bank stock, you should check out this FREE detailed report on its balance sheet.
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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Aareal Bank, it has a TSR of -24% for the last year. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
We regret to report that Aareal Bank shareholders are down 24% for the year (even including dividends). Unfortunately, that’s worse than the broader market decline of 7.3%. 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. On the bright side, long term shareholders have made money, with a gain of 1.4% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. Importantly, we haven’t analysed Aareal Bank’s dividend history. This free visual report on its dividends is a must-read if you’re thinking of buying.
We will like Aareal Bank 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 DE 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.