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Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. 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 Elegant Hotels Group Plc (LON:EHG) shareholders over the last year, as the share price declined 12%. That contrasts poorly with the market return of 2.2%. Longer term investors have fared much better, since the share price is up 3.2% in three years.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.
Even though the Elegant Hotels Group share price is down over the year, its EPS actually improved. It could be that the share price was previously over-hyped. It’s fair to say that the share price does not seem to be reflecting the EPS growth. But we might find some different metrics explain the share price movements better.
Elegant Hotels Group’s dividend seems healthy to us, so we doubt that the yield is a concern for the market. We’d be more worried about the fact that revenue fell 3.7% year on year. The market may be extrapolating the decline, leading to questions around the sustainability of the EPS.
We know that Elegant Hotels Group has improved its bottom line lately, but what does the future have in store? So we recommend checking out this free report showing consensus forecasts
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. In the case of Elegant Hotels Group, it has a TSR of -6.6% for the last year. That exceeds its share price return that we previously mentioned. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Over the last year, Elegant Hotels Group shareholders took a loss of 6.6%, including dividends. In contrast the market gained about 2.2%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Investors are up over three years, booking 6.9% per year, much better than the more recent returns. Sometimes when a good quality long term winner has a weak period, it’s turns out to be an opportunity, but you really need to be sure that the quality is there. Before spending more time on Elegant Hotels Group it might be wise to click here to see if insiders have been buying or selling shares.
Of course Elegant Hotels Group may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB 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.