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Passive investing in index funds can generate returns that roughly match the overall market. But in our experience, buying the right stocks can give your wealth a significant boost. For example, the ITT Inc. (NYSE:ITT) share price is up 80% in the last five years, slightly above the market return. Over the last year the stock price is up, albeit only a modest 0.9%.
There is no denying that markets are sometimes efficient, but prices do not always reflect 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.
ITT's earnings per share are down 13% per year, despite strong share price performance over five years.
This means it's unlikely the market is judging the company based on earnings growth. Because earnings per share don't seem to match up with the share price, we'll take a look at other metrics instead.
The modest 1.0% dividend yield is unlikely to be propping up the share price. The revenue growth of 2.5% per year hardly seems impressive. So it seems one might have to take closer look at earnings and revenue trends to see how they might influence the share price.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
ITT is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So it makes a lot of sense to check out what analysts think ITT will earn in the future (free analyst consensus estimates)
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for ITT the TSR over the last 5 years was 91%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
ITT provided a TSR of 2.1% over the last twelve months. Unfortunately this falls short of the market return. On the bright side, the longer term returns (running at about 14% a year, over half a decade) look better. 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 ITT better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for ITT you should know about.
But note: ITT may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
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.
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