When we invest, we’re generally looking for stocks that outperform the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Exchange Income Corporation (TSE:EIF) share price is up 26% in the last 5 years, clearly besting the market return of around 13% (ignoring dividends).
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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 five years of share price growth, Exchange Income moved from a loss to profitability. That’s generally thought to be a genuine positive, so we would expect to see an increasing share price. Since the company was unprofitable five years ago, but not three years ago, it’s worth taking a look at the returns in the last three years, too. We can see that the Exchange Income share price is down 8.8% in the last three years. In the same period, EPS is up 2.6% per year. So there seems to be a mismatch between the positive EPS growth and the change in the share price, which is down -3.0% per year.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
This free interactive report on Exchange Income’s earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
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, Exchange Income’s TSR for the last 5 years was 76%, which exceeds the share price return mentioned earlier. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
While the broader market lost about 1.2% in the twelve months, Exchange Income shareholders did even worse, losing 20% (even including dividends). Having said that, it’s inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. On the bright side, long term shareholders have made money, with a gain of 12% per year over half a decade. 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. I find it very interesting to look at share price over the long term as a proxy for business…
Go to the news source: Exchange Income (TSE:EIF) Has Compensated Shareholders With A Respectable 76% Re…