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For many, the main point of investing is to generate higher returns than the overall market. But even the best stock picker will only win with some selections. At this point some shareholders may be questioning their investment in PriceSmart, Inc. (NASDAQ:PSMT), since the last five years saw the share price fall 40%. And some of the more recent buyers are probably worried, too, with the stock falling 28% in the last year. Unhappily, the share price slid 1.7% in the last week.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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).
During the five years over which the share price declined, PriceSmart's earnings per share (EPS) dropped by 5.1% each year. Readers should note that the share price has fallen faster than the EPS, at a rate of 9.7% per year, over the period. This implies that the market was previously too optimistic about the stock.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. 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 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 PriceSmart the TSR over the last 5 years was -37%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
PriceSmart shareholders are down 27% for the year (even including dividends), but the market itself is up 12%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 8.9% per year over five years. 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. Before spending more time on PriceSmart it might be wise to click here to see if insiders have been buying or selling shares.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
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 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.