The main aim of stock picking is to find the market-beating stocks. But even the best stock picker will only win with some selections. At this point some shareholders may be questioning their investment in Green Cross Health Limited (NZSE:GXH), since the last five years saw the share price fall 58%.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
Looking back five years, both Green Cross Health's share price and EPS declined; the latter at a rate of 1.9% per year. This reduction in EPS is less than the 16% annual reduction in the share price. So it seems the market was too confident about the business, in the past. The low P/E ratio of 10.08 further reflects this reticence.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.
What about the Total Shareholder Return (TSR)?
We've already covered Green Cross Health's share price action, but we should also mention its total shareholder return (TSR). Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. Green Cross Health's TSR of was a loss of 49% for the 5 years. That wasn't as bad as its share price return, because it has paid dividends.
A Different Perspective
While the broader market gained around 30% in the last year, Green Cross Health shareholders lost 12%. 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. However, the loss over the last year isn't as bad as the 8% per annum loss investors have suffered over the last half decade. We'd need to see some sustained improvements in the key metrics before we could muster much enthusiasm. 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 risks, for instance. Every company has them, and we've spotted 1 warning sign for Green Cross Health you should know about.
We will like Green Cross Health better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on NZ exchanges.
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