Passive investing in index funds can generate returns that are about the same as the overall market. However, you can significantly increase your returns by choosing above-average stocks. For example, the Elders Limited (ASX:ELD) share price is up 50% over the past year, clearly outperforming the market return of around 17% (not including dividends). If it can maintain this strong performance over the long term, investors will do very well. Zooming out, the stock is actually down 26% over the past three years.
It’s also worth looking at the company’s fundamentals here. That’s because it helps determine whether long-term shareholder returns are consistent with the performance of the underlying business.
Check out our latest analysis on older adults.
In his essay “Graham and Doddsville’s Super Investors,” Warren Buffett explained that stock prices do not always rationally reflect the value of a company. By comparing earnings per share (EPS) and share price changes over time, we can learn how investor attitudes to a company have changed over time.
Indeed, Elders’ earnings per share fell 47% in the last year.
This means the market is unlikely to be valuing the company based on its earnings growth. Therefore, investors are likely to be placing more emphasis on indicators other than EPS at the moment.
Since Elders has yet to see a dividend increase, the yield likely won’t be contributing to the share price increase. Sales fell 16% over the 12-month period. I’m a bit surprised by the rise in the stock price, and it’s fair to say I’m cautious.
You can see below how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
Profit and revenue growth
If you are thinking of buying or selling Elders stock, you should check out this free detailed report on its balance sheet.
What will happen to the dividend?
It’s important to consider not only the share price return, but also the total shareholder return for a particular stock. Whereas the price/earnings ratio 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 much higher than the share price return. Coincidentally, Elders’ TSR over the past year was 58%, which is better than the share price return mentioned above. And there’s no kudos to speculating that dividend payments are the main explanation for the divergence.
different perspective
We’re pleased to report that Elders shareholders have delivered a total shareholder return of 58% over one year. Of course, this includes dividends. The 1-year TSR is better than the 5-year TSR (the latter returning 12% per annum), so it looks like the stock has performed better recently. In the best-case scenario, this could signal real business momentum and suggest that now could be a great time to dig deeper. I think it’s very interesting to look at stock price over the long term as an indicator of business performance. But to really gain insight, you need to consider other information as well. For example, we’ve identified 3 warning signs for older adults to be aware of.
story continues
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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 Australian exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
