When we invest, we’re generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. To wit, the Centerra Gold share price has climbed 40% in five years, easily topping the market return of 5.3% (ignoring dividends). On the other hand, the more recent gains haven’t been so impressive, with shareholders gaining just 1.8%.
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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 flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During five years of share price growth, Centerra Gold actually saw its EPS drop 10% per year. This means it’s unlikely the market is judging the company based on earnings growth. Since the change in EPS doesn’t seem to correlate with the change in share price, it’s worth taking a look at other metrics.
On the other hand, Centerra Gold’s revenue is growing nicely, at a compound rate of 7.7% over the last five years. It’s quite possible that management are prioritizing revenue growth over EPS growth at the moment.
The chart below shows how revenue and earnings have changed with time, (if you click on the chart you can see the actual values).
It’s probably worth noting we’ve seen significant insider buying in the last quarter, which we consider a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. So it makes a lot of sense to check out what analysts think Centerra Gold will earn in the future (free profit forecasts)
A Dividend Lost
The value of past dividends are accounted for in the total shareholder return (TSR), but not in the share price return mentioned above. By accounting for the value of dividends paid, the TSR can be seen as a more complete measure of the value a company brings to its shareholders. Centerra Gold’s TSR over the last 5 years is 49%; better than its share price return. Although the company had to cut dividends, it has paid cash to shareholders in the past.
A Different Perspective
Centerra Gold shareholders are up 1.8% for the year. But that was short of the market average. On the bright side, the longer term returns (running at about 8.3% a year, over half a decade) look better. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.
Centerra Gold is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA 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 firstname.lastname@example.org. 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.