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Stock pickers are generally looking for stocks that will outperform the broader market. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the LondonMetric Property Plc (LON:LMP) share price is up 28% in the last 5 years, clearly besting the market decline of around 11% (ignoring 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 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).
LondonMetric Property's earnings per share are down 13% per year, despite strong share price performance over five years. The impact of extraordinary items on earnings, in the last year, partially explain the diversion.
The strong decline in earnings per share suggests the market isn't using EPS to judge the company. The falling EPS doesn't correlate with the climbing share price, so it's worth taking a look at other metrics.
In contrast revenue growth of 6.8% per year is probably viewed as evidence that LondonMetric Property is growing, a real positive. It's quite possible that management are prioritizing revenue growth over EPS growth at the moment.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. So we recommend checking out this free report showing consensus forecasts
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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 LondonMetric Property the TSR over the last 5 years was 60%, 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
Although it hurts that LondonMetric Property returned a loss of 2.6% in the last twelve months, the broader market was actually worse, returning a loss of 11%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 10% for each year. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. It's always interesting to track share price performance over the longer term. But to understand LondonMetric Property better, we need to consider many other factors. Take risks, for example - LondonMetric Property has 3 warning signs (and 1 which is potentially serious) we think you should know about.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB 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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