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Low-cost index funds make it easy to achieve average market returns. But if you invest in individual stocks, some are likely to underperform. For example, the Graham Holdings Company (NYSE:GHC) share price return of 40% over three years lags the market return in the same period. Zooming in, the stock is up a respectable 15% in the last year.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 three years of share price growth, Graham Holdings actually saw its earnings per share (EPS) drop 12% per year. So we doubt that the market is looking to EPS for its main judge of the company’s value. Therefore, we think it’s worth considering other metrics as well.
Languishing at just 0.8%, we doubt the dividend is doing much to prop up the share price. We severely doubt anyone is particularly impressed with the modest 1.1% three-year revenue growth rate. While we don’t have an obvious theory to explain the share price rise, a closer look at the data might be enlightening.
Depicted in the graphic below, you’ll see revenue and earnings over time. If you want more detail, you can click on the chart itself.
We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Graham Holdings the TSR over the last 3 years was 43%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
We’re pleased to report that Graham Holdings shareholders have received a total shareholder return of 16% over one year. That’s including the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 11% per year), it would seem that the stock’s performance has improved in recent times. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. Investors who like to make money usually check up on insider purchases, such as the price paid, and total amount bought. You can find out about the insider purchases of Graham Holdings by clicking this link.
Graham Holdings 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.