An index fund allows you to match the overall market return. Active investors seek to purchase stocks that outperform the market, but they run the risk of underperformance. The example of the NZX Limited (NZSE:NZXThe share price has dropped 12% in the past year. This is significantly less than the market decline of 1.4%. The stock has fallen 4.0% over the past three years, but the long-term returns have not been as bad.
Let’s take a look at the long-term performance of the company and compare it to the progress of the underlying business.
Benjamin Graham says, “Over the short term the market can be described as a voting machine but over the long term it can be described as a weighing device.” A simple, but imperfect way to see how market perceptions of companies have changed is to compare changes in earnings per share (EPS), and the movement in share prices.
NZX saw an 14% drop in EPS over the past year. We are very pleased to see that the 12% drop of share price is close to the EPS decline. Investors might lose faith in the stock if the EPS was lower, but it doesn’t seem to have happened. The only thing that seems to have caused the drop in share prices is the decrease in earnings per share.
Below is an image that shows how EPS has changed over time. Click on the image to see more detail.
We recommend that you carefully examine any stock before buying or selling it. historic growth trends, available here.
What about Dividends
When looking at investment returns it is important that you consider the differences between Total shareholder return (TSR) share price return. TSR also includes any discount capital raisings or spin-offs. TSR is a more complete measure of the stock’s return. NZX’s TSR was -7.1% over the last year, which is significantly higher than the return on share prices. It’s not hard to guess that the divergence is due in large part to the dividend payments.
A Different Perspective
We regret to announce that NZX shareholders have fallen 7.1% over the past year, even including dividends. It’s worse than 1.4% market decline. It could be that the share market jitters have impacted the share price. In the event of a great opportunity, it might be worthwhile to keep an eye on fundamentals. Long-term shareholders have been making money with an average gain of 8% per annum over the past half decade. The current sell-off may be worth looking into if the fundamental data continues to point to long term sustainable growth. It is very interesting to consider the share price over time as a proxy of business performance. To gain real insight, however, we must consider other information. Learn about the 3 warning signs we’ve spotted with NZX (including 2 which make us uncomfortable) .
However, take note: NZX is not the best stock to invest in. Take a look at this. Free list of interesting companies with past earnings growth (and further growth forecast).
Please note that the market returns in this article are the market weighted average returns for stocks trading on New Zealander exchanges.
Let us know what you think about this article. Have a question about the content? Get in touch Contact us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article is by Simply Wall St. It is general in nature. Our commentary is based only on historical data and analyst projections. This does not constitute a recommendation for you to buy or sell any stock. It also does not take into account your financial goals. Our goal is to provide you with long-term, focused analysis based on fundamental data. Our analysis may not take into account the most recent price-sensitive company announcements and qualitative material. Simply Wall St does not hold any position in the stocks mentioned.
Participate in a Paid User Research Session
You’ll receive a Amazon Gift Card: US$30 Spend an hour helping us to create better tools for individual investors. Sign up here