Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Canadian Tire Corporation, Limited (TSE:CTC.A) share price is up 24% in the last 5 years, clearly besting the market return of around 9.0% (ignoring dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 5.6% , including dividends .
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.
Over half a decade, Canadian Tire Corporation managed to grow its earnings per share at 8.2% a year. This EPS growth is higher than the 4.4% average annual increase in the share price. So it seems the market isn't so enthusiastic about the stock these days.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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 and spin-offs. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Canadian Tire Corporation, it has a TSR of 37% for the last 5 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
Canadian Tire Corporation provided a TSR of 5.6% over the last twelve months. But that return falls short of the market. If we look back over five years, the returns are even better, coming in at 6.5% per year for five years. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. If you would like to research Canadian Tire Corporation in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
We will like Canadian Tire Corporation 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 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 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.