Preferred Bank (NASDAQ:PFBC) sheds 6.0% this week, as yearly returns fall more in line with earnings growth

By buying an index fund, you can roughly match the market return with ease. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. Just take a look at Preferred Bank (NASDAQ:PFBC), which is up 77%, over three years, soundly beating the market return of 17% (not including dividends).

While the stock has fallen 6.0% this week, it's worth focusing on the longer term and seeing if the stocks historical returns have been driven by the underlying fundamentals.

View our latest analysis for Preferred Bank

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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).

Preferred Bank was able to grow its EPS at 35% per year over three years, sending the share price higher. This EPS growth is higher than the 21% average annual increase in the share price. So one could reasonably conclude that the market has cooled on the stock. We'd venture the lowish P/E ratio of 5.45 also reflects the negative sentiment around the stock.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

It is of course excellent to see how Preferred Bank has grown profits over the years, but the future is more important for shareholders. You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Preferred Bank's TSR for the last 3 years was 93%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

Preferred Bank shareholders are down 8.2% for the year (even including dividends), but the market itself is up 17%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 7%, 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. 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. Case in point: We've spotted 2 warning signs for Preferred Bank you should be aware of, and 1 of them doesn't sit too well with us.

But note: Preferred Bank may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American 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.