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Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. That downside risk was realized by Continental Aktiengesellschaft (FRA:CON) shareholders over the last year, as the share price declined 34%. That contrasts poorly with the market return of -3.9%. Longer term shareholders haven't suffered as badly, since the stock is down a comparatively less painful 19% in three years.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
Unhappily, Continental had to report a 2.9% decline in EPS over the last year. The share price decline of 34% is actually more than the EPS drop. This suggests the EPS fall has made some shareholders are more nervous about the business. The less favorable sentiment is reflected in its current P/E ratio of 10.23.
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?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Continental the TSR over the last year was -32%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
While the broader market lost about 3.9% in the twelve months, Continental shareholders did even worse, losing 32% (even including dividends). Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 0.2% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. Keeping this in mind, a solid next step might be to take a look at Continental's dividend track record. This free interactive graph is a great place to start.
Of course Continental may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on DE 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 firstname.lastname@example.org. 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.