When we invest, we're generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, long term First Sponsor Group Limited (SGX:ADN) shareholders have enjoyed a 14% share price rise over the last half decade, well in excess of the market decline of around 8.5% (not including dividends).
There is no denying that markets are sometimes efficient, but prices do not always reflect 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.
Over half a decade, First Sponsor Group managed to grow its earnings per share at 22% a year. This EPS growth is higher than the 3% average annual increase in the share price. So it seems the market isn't so enthusiastic about the stock these days. The reasonably low P/E ratio of 5.54 also suggests market apprehension.
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. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for First Sponsor Group the TSR over the last 5 years was 25%, 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 it's never nice to take a loss, First Sponsor Group shareholders can take comfort that , including dividends,their trailing twelve month loss of 5.7% wasn't as bad as the market loss of around 10%. Longer term investors wouldn't be so upset, since they would have made 5%, each year, over five years. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. 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. Take risks, for example - First Sponsor Group has 2 warning signs we think you should be aware of.
First Sponsor Group is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on SG 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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