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, long term Flagstar Bancorp, Inc. (NYSE:FBC) shareholders have enjoyed a 73% share price rise over the last half decade, well in excess of the market return of around 47% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 4.3%, including dividends.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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.
Flagstar Bancorp's earnings per share are down 5.9% 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.
We doubt the modest 0.5% dividend yield is attracting many buyers to the stock. In contrast revenue growth of 11% per year is probably viewed as evidence that Flagstar Bancorp is growing, a real positive. It's quite possible that management are prioritizing revenue growth over EPS growth at the moment.
You can see how revenue and earnings have changed over time in the image below, (click on the chart to see cashflow).
We know that Flagstar Bancorp has improved its bottom line lately, but what does the future have in store? You can see what analysts are predicting for Flagstar Bancorp in this interactive graph of future profit estimates.
A Different Perspective
Flagstar Bancorp provided a TSR of 4.3% over the last twelve months. But that return falls short of the market. On the bright side, the longer term returns (running at about 12% 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. Before spending more time on Flagstar Bancorp it might be wise to click here to see if insiders have been buying or selling shares.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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.