When you buy a stock there is always a possibility that it could drop 100%. But on a lighter note, a good company can see its share price rise well over 100%. For instance, the price of W. R. Berkley Corporation (NYSE:WRB) stock is up an impressive 105% over the last five years. Meanwhile the share price is 4.5% higher than it was a week ago.
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. 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.
During five years of share price growth, W. R. Berkley actually saw its EPS drop 7.8% per year.
This means it's unlikely the market is judging the company based on earnings growth. Because earnings per share don't seem to match up with the share price, we'll take a look at other metrics instead.
We doubt the modest 0.7% dividend yield is attracting many buyers to the stock. We are not particularly impressed by the annual compound revenue growth of 1.5% over five years. So it seems one might have to take closer look at earnings and revenue trends to see how they might influence the share price.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
Take a more thorough look at W. R. Berkley'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 is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, W. R. Berkley's TSR for the last 5 years was 129%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
While the broader market gained around 25% in the last year, W. R. Berkley shareholders lost 0.8% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 18%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with W. R. Berkley , and understanding them should be part of your investment process.
Of course W. R. Berkley may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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What are the risks and opportunities for W. R. Berkley?
Trading at 38.6% below our estimate of its fair value
Earnings are forecast to grow 5.84% per year
Earnings grew by 35.1% over the past year
No risks detected for WRB from our risks checks.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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