The simplest way to benefit from a rising market is to buy an index fund. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. Investors in PacWest Bancorp (NASDAQ:PACW) have tasted that bitter downside in the last year, as the share price dropped 26%. That falls noticeably short of the market return of around 1.4%. The silver lining (for longer term investors) is that the stock is still 6.6% higher than it was three years ago. The last week also saw the share price slip down another 5.3%.
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 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.
During the unfortunate twelve months during which the PacWest Bancorp share price fell, it actually saw its earnings per share (EPS) improve by 28%. It’s quite possible that growth expectations may have been unreasonable in the past. It’s surprising to see the share price fall so much, despite the improved EPS. So it’s well worth checking out some other metrics, too.
PacWest Bancorp’s dividend seems healthy to us, so we doubt that the yield is a concern for the market. The revenue trend doesn’t seem to explain why the share price is down. Of course, it could simply be that it simply fell short of the market consensus expectations.
The graphic below shows how revenue and earnings have changed as management guided the business forward. If you want to see cashflow, you can click on the chart.
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. So it makes a lot of sense to check out what analysts think PacWest Bancorp will earn in the future (free profit forecasts)
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, PacWest Bancorp’s TSR for the last year was -22%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
PacWest Bancorp shareholders are down 22% for the year (even including dividends), but the market itself is up 1.4%. 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 2.2% 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. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.
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 US exchanges.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.