What Type Of Returns Would Cato's(NYSE:CATO) Shareholders Have Earned If They Purchased Their SharesFive Years Ago?

It is a pleasure to report that the The Cato Corporation (NYSE:CATO) is up 65% in the last quarter. But don't envy holders -- looking back over 5 years the returns have been really bad. Indeed, the share price is down 72% in the period. So is the recent increase sufficient to restore confidence in the stock? Not yet. We'd err towards caution given the long term under-performance.

See our latest analysis for Cato

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

In the last half decade Cato saw its share price fall as its EPS declined below zero. Since the company has fallen to a loss making position, it's hard to compare the change in EPS with the share price change. But we would generally expect a lower price, given the situation.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

This free interactive report on Cato's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

What about the Total Shareholder Return (TSR)?

We'd be remiss not to mention the difference between Cato's total shareholder return (TSR) and its share price return. The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. Its history of dividend payouts mean that Cato's TSR, which was a 62% drop over the last 5 years, was not as bad as the share price return.

A Different Perspective

While the broader market gained around 27% in the last year, Cato shareholders lost 27%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 10% per year over five years. We realise that Baron Rothschild 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 business. 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. Even so, be aware that Cato is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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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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