The main aim of stock picking is to find the market-beating stocks. But the main game is to find enough winners to more than offset the losers At this point some shareholders may be questioning their investment in Alliance Data Systems Corporation (NYSE:ADS), since the last five years saw the share price fall 28%. The silver lining is that the stock is up 1.2% in about a 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. 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 the unfortunate half decade during which the share price slipped, Alliance Data Systems actually saw its earnings per share (EPS) improve by 12% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past. Because of the sharp contrast between the EPS growth rate and the share price growth, we’re inclined to look to other metrics to understand the changing market sentiment around the stock.
We don’t think that the 1.4% is big factor in the share price, since it’s quite small, as dividends go. In contrast to the share price, revenue has actually increased by 11% a year in the five year period. A more detailed examination of the revenue and earnings may or may not explain why the share price languishes; there could be an opportunity.
You can see how revenue and earnings have changed over time in the image below, (click on the chart to see cashflow).
Alliance Data Systems is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. If you are thinking of buying or selling Alliance Data Systems stock, you should check out this free report showing analyst consensus estimates for future profits.
What about the Total Shareholder Return (TSR)?
We’d be remiss not to mention the difference between Alliance Data Systems’s total shareholder return (TSR) and its 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. Alliance Data Systems’s TSR of was a loss of 26% for the 5 years. That wasn’t as bad as its share price return, because it has paid dividends.
A Different Perspective
Alliance Data Systems shareholders are down 13% for the year (even including dividends), but the market itself is up 12%. 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. Unfortunately, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 5.9% over the last half decade. We realise that Buffett 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 businesses. Before spending more time on Alliance Data Systems it might be wise to click here to see if insiders have been buying or selling shares.
But note: Alliance Data Systems may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).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 email@example.com. 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.