The simplest way to benefit from a rising market is to buy an index fund. But if you buy individual stocks, you can do both better or worse than that. For example, the A2A S.p.A. (BIT:A2A) share price is down 22% in the last year. That's disappointing when you consider the market declined 7.6%. Longer term shareholders haven't suffered as badly, since the stock is down a comparatively less painful 17% in three years. The silver lining is that the stock is up 3.0% in about a week.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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 A2A share price is down over the year, its EPS actually improved. It could be that the share price was previously over-hyped.
The divergence between the EPS and the share price is quite notable, during the year. So it's easy to justify a look at some other metrics.
We don't see any weakness in the A2A's dividend so the steady payout can't really explain the share price drop. We'd be more worried about the fact that revenue fell 8.9% year on year. The market may be extrapolating the decline, leading to questions around the sustainability of the EPS.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
We know that A2A has improved its bottom line lately, but what does the future have in store? You can see what analysts are predicting for A2A in this interactive graph of future profit estimates.
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. We note that for A2A the TSR over the last year was -17%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
While the broader market lost about 7.6% in the twelve months, A2A shareholders did even worse, losing 17% (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. Longer term investors wouldn't be so upset, since they would have made 5%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand A2A better, we need to consider many other factors. Case in point: We've spotted 2 warning signs for A2A you should be aware of.
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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 IT exchanges.
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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. 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.
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