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Did Changing Sentiment Drive Sims Metal Management's (ASX:SGM) Share Price Down By 40%?

Simply Wall St

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The simplest way to benefit from a rising market is to buy an index fund. But if you buy individual stocks, you can do both better or worse than that. Unfortunately the Sims Metal Management Limited (ASX:SGM) share price slid 40% over twelve months. That contrasts poorly with the market return of 7.5%. On the other hand, the stock is actually up 16% over three years. Even worse, it's down 13% in about a month, which isn't fun at all.

See our latest analysis for Sims Metal Management

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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

Unfortunately Sims Metal Management reported an EPS drop of 14% for the last year. This reduction in EPS is not as bad as the 40% share price fall. So it seems the market was too confident about the business, a year ago. The less favorable sentiment is reflected in its current P/E ratio of 10.63.

The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).

ASX:SGM Past and Future Earnings, May 8th 2019

We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. This free interactive report on Sims Metal Management's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Sims Metal Management the TSR over the last year was -37%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

Investors in Sims Metal Management had a tough year, with a total loss of 37% (including dividends), against a market gain of about 7.5%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 4.1%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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.

Sims Metal Management 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 AU 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 editorial-team@simplywallst.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.