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 Stanley Black & Decker, Inc. (NYSE:SWK) shareholders have enjoyed a 66% share price rise over the last half decade, well in excess of the market return of around 44% (not including dividends).
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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).
During five years of share price growth, Stanley Black & Decker achieved compound earnings per share (EPS) growth of 3.9% per year. This EPS growth is slower than the share price growth of 11% per year, over the same period. This suggests that market participants hold the company in higher regard, these days. And that’s hardly shocking given the track record of growth.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
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. This free interactive report on Stanley Black & Decker’s earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
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 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. In the case of Stanley Black & Decker, it has a TSR of 83% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
Investors in Stanley Black & Decker had a tough year, with a total loss of 16% (including dividends), against a market gain of about 5.6%. 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. Longer term investors wouldn’t be so upset, since they would have made 13%, 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 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.
Stanley Black & Decker 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 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.