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By buying an index fund, investors can approximate the average market return. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. Just take a look at Quanta Services, Inc. (NYSE:PWR), which is up 55%, over three years, soundly beating the market return of 31% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 0.8% in the last year, including dividends.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 three years of share price growth, Quanta Services achieved compound earnings per share growth of 70% per year. The average annual share price increase of 16% is actually lower than the EPS growth. So it seems investors have become more cautious about the company, over time.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
A Different Perspective
Quanta Services provided a TSR of 0.8% over the last twelve months. Unfortunately this falls short of the market return. On the bright side, the longer term returns (running at about 2.0% 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. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.
Quanta Services is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
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.