Did Changing Sentiment Drive Capital Appreciation's (JSE:CTA) Share Price Down By 20%?
Many investors define successful investing as beating the market average over the long term. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Capital Appreciation Limited (JSE:CTA) shareholders have had that experience, with the share price dropping 20% in three years, versus a market return of about 29%. There was little comfort for shareholders in the last week as the price declined a further 1.3%.
View 2 warning signs we detected for Capital Appreciation
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 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 the unfortunate three years of share price decline, Capital Appreciation actually saw its earnings per share (EPS) improve by 37% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Or else the company was over-hyped in the past, and so its growth has disappointed.
It's worth taking a look at other metrics, because the EPS growth doesn't seem to match with the falling share price.
Given the healthiness of the dividend payments, we doubt that they've concerned the market. Revenue has been pretty flat over three years, so that isn't an obvious reason shareholders would sell. So it might be worth looking at how revenue growth over time, in greater detail.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. This free interactive report on Capital Appreciation's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Capital Appreciation's TSR for the last 3 years was -9.2%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Over the last year, Capital Appreciation shareholders took a loss of 3.3% , including dividends . In contrast the market gained about 12%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Shareholders have lost 3.2% per year over the last three years, so the share price drop has become steeper, over the last year; a potential symptom of as yet unsolved challenges. Although Warren Buffett famously said he likes to 'buy when there is blood on the streets', he also focusses on high quality stocks with solid prospects. It's always interesting to track share price performance over the longer term. But to understand Capital Appreciation better, we need to consider many other factors. For example, we've discovered 2 warning signs for Capital Appreciation which any shareholder or potential investor should be aware of.
Capital Appreciation is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on ZA exchanges.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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