One simple way to benefit from the stock market is to buy an index fund. But if you choose individual stocks with prowess, you can make superior returns. For example, Forrester Research, Inc. (NASDAQ:FORR) shareholders have seen the share price rise 56% over three years, well in excess of the market return (41%, not including dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 20% in the last year, including dividends.
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.
Forrester Research was able to grow its EPS at 8.3% per year over three years, sending the share price higher. This EPS growth is lower than the 16% average annual increase in the share price. This suggests that, as the business progressed over the last few years, it gained the confidence of market participants. It’s not unusual to see the market ‘re-rate’ a stock, after a few years of growth. This favorable sentiment is reflected in its (fairly optimistic) P/E ratio of 58.52.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We’re pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Forrester Research, it has a TSR of 64% for the last 3 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
It’s good to see that Forrester Research has rewarded shareholders with a total shareholder return of 20% in the last twelve months. Of course, that includes the dividend. That gain is better than the annual TSR over five years, which is 7.4%. Therefore it seems like sentiment around the company has been positive lately. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.
We will like Forrester Research better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.