It might seem bad, but the worst that can happen when you buy a stock (without leverage) is that its share price goes to zero. But when you pick a company that is really flourishing, you can make more than 100%. For example, the Arcos Dorados Holdings Inc. (NYSE:ARCO) share price has soared 195% in the last three years. Most would be happy with that. The last week saw the share price soften some 2.6%.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
Arcos Dorados Holdings became profitable within the last three years. That kind of transition can be an inflection point that justifies a strong share price gain, just as we have seen here.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Arcos Dorados Holdings has improved its bottom line over the last three years, but what does the future have in store? Take a more thorough look at Arcos Dorados Holdings’s financial health with this free report on its balance sheet.
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 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 Arcos Dorados Holdings, it has a TSR of 199% for the last 3 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
Arcos Dorados Holdings shareholders are down 13% for the year (even including dividends), but the market itself is up 3.5%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 2.9% 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. Is Arcos Dorados Holdings cheap compared to other companies? These 3 valuation measures might help you decide.
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 email@example.com. 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.