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In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But even the best stock picker will only win with some selections. So we wouldn't blame long term International Business Machines Corporation (NYSE:IBM) shareholders for doubting their decision to hold, with the stock down 16% over a half decade.
If the past week is anything to go by, investor sentiment for International Business Machines isn't positive, so let's see if there's a mismatch between fundamentals and the share price.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.
Looking back five years, both International Business Machines' share price and EPS declined; the latter at a rate of 15% per year. This fall in the EPS is worse than the 3% compound annual share price fall. So the market may previously have expected a drop, or else it expects the situation will improve.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We know that International Business Machines has improved its bottom line lately, but is it going to grow revenue? You could check out this free report showing analyst revenue forecasts.
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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for International Business Machines the TSR over the last 5 years was 12%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
While it's never nice to take a loss, International Business Machines shareholders can take comfort that , including dividends,their trailing twelve month loss of 2.4% wasn't as bad as the market loss of around 12%. Longer term investors wouldn't be so upset, since they would have made 2%, each year, over five years. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. It's always interesting to track share price performance over the longer term. But to understand International Business Machines better, we need to consider many other factors. To that end, you should be aware of the 2 warning signs we've spotted with International Business Machines .
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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.