Buying a low-cost index fund will get you the average market return. But across the board there are plenty of stocks that underperform the market. For example, the Ares Commercial Real Estate Corporation (NYSE:ACRE) share price return of 26% over three years lags the market return in the same period. Looking at more recent returns, the stock is up 9.6% in a year.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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 three years of share price growth, Ares Commercial Real Estate achieved compound earnings per share growth of 14% per year. This EPS growth is higher than the 7.9% average annual increase in the share price. So it seems investors have become more cautious about the company, over time. We’d venture the lowish P/E ratio of 11.32 also reflects the negative sentiment around the stock.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
It’s good to see that there was some significant insider buying in the last three months. That’s a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
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. We note that for Ares Commercial Real Estate the TSR over the last 3 years was 62%, which is better than the share price return mentioned above. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It’s good to see that Ares Commercial Real Estate has rewarded shareholders with a total shareholder return of 20% in the last twelve months. And that does include the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 13% per year), it would seem that the stock’s performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. 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.
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 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.