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If You Had Bought CarMax (NYSE:KMX) Shares Five Years Ago You'd Have Earned52% Returns

Simply Wall St
·3 mins read

If you want to compound wealth in the stock market, you can do so by buying an index fund. But the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the CarMax, Inc. (NYSE:KMX) share price is up 52% in the last five years, slightly above the market return. Zooming in, the stock is up a respectable 7.2% in the last year.

Check out our latest analysis for CarMax

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During five years of share price growth, CarMax achieved compound earnings per share (EPS) growth of 5.9% per year. This EPS growth is lower than the 8.7% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. And that's hardly shocking given the track record of growth.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

earnings-per-share-growth
earnings-per-share-growth

This free interactive report on CarMax's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

A Different Perspective

CarMax provided a TSR of 7.2% 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 8.7% per year for five years. It's quite possible the business continues to execute with prowess, even as the share price gains are slowing. It's always interesting to track share price performance over the longer term. But to understand CarMax better, we need to consider many other factors. To that end, you should learn about the 3 warning signs we've spotted with CarMax (including 1 which is shouldn't be ignored) .

We will like CarMax 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.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.