Investors can approximate the average market return by buying an index fund. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. For example, the Ardagh Group S.A. (NYSE:ARD) share price is down 15% in the last year. That's disappointing when you consider the market returned 25%. At least the damage isn't so bad if you look at the last three years, since the stock is down 12% in that time. Unhappily, the share price slid 2.7% in the last week.
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 way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During the unfortunate twelve months during which the Ardagh Group share price fell, it actually saw its earnings per share (EPS) improve by 45%. Of course, the situation might betray previous over-optimism about growth. Extraordinary items have impacted profits over the last twelve months.
It's fair to say that the share price does not seem to be reflecting the EPS growth. So it's easy to justify a look at some other metrics.
Revenue was fairly steady year on year, which isn't usually such a bad thing. However, it is certainly possible the market was expecting an uptick in revenue, and that the share price fall reflects that disappointment.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Balance sheet strength is crucial. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.
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 spin-offs or 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 Ardagh Group, it has a TSR of -11% for the last year. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Ardagh Group shareholders are down 11% for the year, (even including dividends), but the broader market is up 25%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. The three-year loss of 0.3% per year isn't as bad as the last twelve months, suggesting that the company has not been able to convince the market it has solved its problems. We would be wary of buying into a company with unsolved problems, although some investors will buy into struggling stocks if they believe the price is sufficiently attractive. 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. Take risks, for example - Ardagh Group has 1 warning sign we think you should be aware of.
We will like Ardagh Group better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, 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.
When trading Ardagh Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.