It’s easy to match the overall market return by buying an index fund. Active investors aim to buy stocks that vastly outperform the market – but in the process, they risk under-performance. For example, the Admiral Group plc (LON:ADM) share price is down 30% in the last year. That’s disappointing when you consider the market declined 11%. At least the damage isn’t so bad if you look at the last three years, since the stock is down 1.1% in that time.
Now let’s have a look at the company’s fundamentals, and see if the long term shareholder return has matched the performance of the underlying business.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
Unfortunately Admiral Group reported an EPS drop of 42% for the last year. The share price fall of 30% isn’t as bad as the reduction in earnings per share. So the market may not be too worried about the EPS figure, at the moment — or it may have expected earnings to drop faster.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. Dive deeper into the earnings by checking this interactive graph of Admiral Group’s earnings, revenue and cash flow.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. We note that for Admiral Group the TSR over the last 1 year was -23%, which is better than the share price return mentioned above. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
We regret to report that Admiral Group shareholders are down 23% for the year (even including dividends). Unfortunately, that’s worse than the broader market decline of 11%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there’s a good opportunity. Longer term investors wouldn’t be so upset, since they would have made 9%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We’ve identified 2 warning signs with Admiral Group , and understanding them should be part of your investment process.
Admiral Group is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB 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 only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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