Those who invested in Severn Trent (LON:SVT) five years ago are up 62%

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Severn Trent PLC (LON:SVT) share price is up 32% in the last 5 years, clearly besting the market return of around 2.4% (ignoring dividends).

With that in mind, it's worth seeing if the company's underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.

View our latest analysis for Severn Trent

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.

During five years of share price growth, Severn Trent actually saw its EPS drop 20% per year.

Essentially, it doesn't seem likely that investors are focused on EPS. Because earnings per share don't seem to match up with the share price, we'll take a look at other metrics instead.

We note that the dividend is higher than it was previously - always nice to see. Maybe dividend investors have helped support the share price. We'd posit that the revenue growth over the last five years, of 4.8% per year, would encourage people to invest.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. So we recommend checking out this free report showing consensus forecasts

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Severn Trent, it has a TSR of 62% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

A Different Perspective

While the broader market gained around 8.7% in the last year, Severn Trent shareholders lost 4.7% (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. On the bright side, long term shareholders have made money, with a gain of 10% 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. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For example, we've discovered 4 warning signs for Severn Trent (2 shouldn't be ignored!) that you should be aware of before investing here.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

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.