Some stocks are best avoided. We don't wish catastrophic capital loss on anyone. Spare a thought for those who held AA plc (LON:AA.) for five whole years - as the share price tanked 96%. And some of the more recent buyers are probably worried, too, with the stock falling 83% in the last year. The falls have accelerated recently, with the share price down 71% in the last three months. Of course, this share price action may well have been influenced by the 29% decline in the broader market, throughout the period.
While a drop like that is definitely a body blow, money isn't as important as health and happiness.
See our latest analysis for AA
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).
During the five years over which the share price declined, AA's earnings per share (EPS) dropped by 12% each year. Readers should note that the share price has fallen faster than the EPS, at a rate of 47% per year, over the period. So it seems the market was too confident about the business, in the past. The low P/E ratio of 1.89 further reflects this reticence.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. This free interactive report on AA's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
A Different Perspective
While the broader market lost about 20% in the twelve months, AA shareholders did even worse, losing 82% (even including dividends) . 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. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 46% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. It's always interesting to track share price performance over the longer term. But to understand AA better, we need to consider many other factors. For instance, we've identified 3 warning signs for AA (1 can't be ignored) that you should be aware of.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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. Thank you for reading.