Market is not liking Taylor Wimpey's (LON:TW.) earnings decline as stock retreats 5.8% this week

Investors can approximate the average market return by buying an index fund. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. For example, the Taylor Wimpey plc (LON:TW.) share price is down 28% in the last year. That contrasts poorly with the market return of 9.0%. Longer term shareholders haven't suffered as badly, since the stock is down a comparatively less painful 1.5% in three years. On top of that, the share price is down 5.8% in the last week.

If the past week is anything to go by, investor sentiment for Taylor Wimpey isn't positive, so let's see if there's a mismatch between fundamentals and the share price.

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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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

Unfortunately Taylor Wimpey reported an EPS drop of 37% for the last year. This fall in the EPS is significantly worse than the 28% the share price fall. So despite the weak per-share profits, some investors are probably relieved the situation wasn't more difficult.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

Dive deeper into Taylor Wimpey's key metrics by checking this interactive graph of Taylor Wimpey'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. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Taylor Wimpey's TSR for the last 1 year was -22%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

While the broader market gained around 9.0% in the last year, Taylor Wimpey shareholders lost 22% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 1.6%, each year, over five years. 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Taylor Wimpey (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on British 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.