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Investors can buy low cost index fund if they want to receive the average market return. But in any diversified portfolio of stocks, you'll see some that fall short of the average. That's what has happened with the Advanced Drainage Systems, Inc. (NYSE:WMS) share price. It's up 20% over three years, but that is below the market return. In the last year the stock has gained 12%.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.
Advanced Drainage Systems was able to grow its EPS at 97% per year over three years, sending the share price higher. The average annual share price increase of 6.2% is actually lower than the EPS growth. So one could reasonably conclude that the market has cooled on the stock.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We know that Advanced Drainage Systems has improved its bottom line over the last three years, but what does the future have in store? If you are thinking of buying or selling Advanced Drainage Systems stock, you should check out this FREE detailed report on its balance sheet.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Advanced Drainage Systems, it has a TSR of 24% for the last 3 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It's nice to see that Advanced Drainage Systems shareholders have gained 13% (in total) over the last year. That includes the value of the dividend. That's better than the annualized TSR of 7.4% over the last three years. These improved returns may hint at some real business momentum, implying that now could be a great time to delve deeper. Before spending more time on Advanced Drainage Systems it might be wise to click here to see if insiders have been buying or selling shares.
Of course Advanced Drainage Systems may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.