Investors can approximate the average market return by buying an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. That downside risk was realized by Meliá Hotels International, S.A. (BME:MEL) shareholders over the last year, as the share price declined 31%. That contrasts poorly with the market return of 2.4%. Longer term shareholders haven’t suffered as badly, since the stock is down a comparatively less painful 22% in three years. Even worse, it’s down 9.3% in about a month, which isn’t fun at all. This could be related to the recent financial results – you can catch up on the most recent data by reading our company report.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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 Meliá Hotels International share price is down over the year, its EPS actually improved. It’s quite possible that growth expectations may have been unreasonable in the past. It’s surprising to see the share price fall so much, despite the improved EPS. But we might find some different metrics explain the share price movements better.
Revenue was pretty flat on last year, which isn’t too bad. But the share price might be lower because the market expected a meaningful improvement, and got none.
You can see how revenue and earnings have changed over time in the image below, (click on the chart to see cashflow).
Meliá Hotels International is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for Meliá Hotels International in this interactive graph of future profit estimates.
What about the Total Shareholder Return (TSR)?
Investors should note that there’s a difference between Meliá Hotels International’s total shareholder return (TSR) and its share price change, which we’ve covered above. The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. Dividends have been really beneficial for Meliá Hotels International shareholders, and that cash payout explains why its total shareholder loss of 30%, over the last year, isn’t as bad as the share price return.
A Different Perspective
While the broader market gained around 2.4% in the last year, Meliá Hotels International shareholders lost 30% (even including dividends). 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. Unfortunately, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 2.4% over the last half decade. We realise that Buffett 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 businesses. Is Meliá Hotels International cheap compared to other companies? These 3 valuation measures might help you decide.
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 ES 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.