It’s easy to match the overall market return by buying an index fund. But if you buy individual stocks, you can do both better or worse than that. Investors in Culp, Inc. (NYSE:CULP) have tasted that bitter downside in the last year, as the share price dropped 43%. That contrasts poorly with the market return of 3.9%. Notably, shareholders had a tough run over the longer term, too, with a drop of 33% in the last three years. The falls have accelerated recently, with the share price down 12% in the last three months. We note that the company has reported results fairly recently; and the market is hardly delighted. You can check out the latest numbers in our company report.
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.
During the unfortunate twelve months during which the Culp share price fell, it actually saw its earnings per share (EPS) improve by 35%. 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.
On the other hand, we’re certainly perturbed by the 5.9% decline in Culp’s revenue. Many investors see falling revenue as a likely precursor to lower earnings, so this could well explain the weak share price.
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 consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. You can see what analysts are predicting for Culp in this interactive graph of future profit estimates.
What about the Total Shareholder Return (TSR)?
Investors should note that there’s a difference between Culp’s total shareholder return (TSR) and its share price change, which we’ve covered above. 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. Culp’s TSR of was a loss of 42% for the year. That wasn’t as bad as its share price return, because it has paid dividends.
A Different Perspective
Culp shareholders are down 42% for the year (even including dividends), but the market itself is up 3.9%. 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. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 0.1% per year over five years. We realise that Buffett has said investors should ‘buy when there is blood on the streets’, but we caution that investors should first be sure they are buying a high quality businesses. 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.
Culp 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.