Passive investing in index funds can generate returns that roughly match the overall market. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). To wit, the National Tyre & Wheel Limited (ASX:NTD) share price is 92% higher than it was a year ago, much better than the market decline of around 6.7% (not including dividends) in the same period. If it can keep that out-performance up over the long term, investors will do very well! We'll need to follow National Tyre & Wheel for a while to get a better sense of its share price trend, since it hasn't been listed for particularly long.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.
During the last year, National Tyre & Wheel actually saw its earnings per share drop 29%.
Given the share price gain, we doubt the market is measuring progress with EPS. Indeed, when EPS is declining but the share price is up, it often means the market is considering other factors.
National Tyre & Wheel's revenue actually dropped 5.7% over last year. So using a snapshot of key business metrics doesn't give us a good picture of why the market is bidding up the stock.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Balance sheet strength is crucial. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.
What about the Total Shareholder Return (TSR)?
Investors should note that there's a difference between National Tyre & Wheel's total shareholder return (TSR) and its share price change, which we've covered above. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Dividends have been really beneficial for National Tyre & Wheel shareholders, and that cash payout contributed to why its TSR of 99%, over the last year, is better than the share price return.
A Different Perspective
National Tyre & Wheel shareholders should be happy with the total gain of 99% over the last twelve months. And the share price momentum remains respectable, with a gain of 72% in the last three months. Demand for the stock from multiple parties is pushing the price higher; it could be that word is getting out about its virtues as a business. It's always interesting to track share price performance over the longer term. But to understand National Tyre & Wheel better, we need to consider many other factors. Take risks, for example - National Tyre & Wheel has 4 warning signs we think you should be aware of.
Of course National Tyre & Wheel 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 AU 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.