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Volatility 101: Should Almirall (BME:ALM) Shares Have Dropped 22%?

Investors can approximate the average market return by buying an index fund. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. For example, the Almirall, S.A. (BME:ALM) share price is down 22% in the last year. That's disappointing when you consider the market returned 4.6%. Zooming out, the stock is down 20% in the last three years. Shareholders have had an even rougher run lately, with the share price down 22% in the last 90 days. This could be related to the recent financial results - you can catch up on the most recent data by reading our company report.

See our latest analysis for Almirall

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.

Even though the Almirall share price is down over the year, its EPS actually improved. It could be that the share price was previously over-hyped.

It's fair to say that the share price does not seem to be reflecting the EPS growth. But we might find some different metrics explain the share price movements better.

Given the yield is quite low, at 1.7%, we doubt the dividend can shed much light on the share price. Almirall's revenue is actually up 13% over the last year. Since the fundamental metrics don't readily explain the share price drop, there might be an opportunity if the market has overreacted.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

BME:ALM Income Statement, February 27th 2020
BME:ALM Income Statement, February 27th 2020

We know that Almirall has improved its bottom line lately, but what does the future have in store? You can see what analysts are predicting for Almirall in this interactive graph of future profit estimates.

What about the Total Shareholder Return (TSR)?

We've already covered Almirall's share price action, but we should also mention its total shareholder return (TSR). 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. Almirall's TSR of was a loss of 21% for the year. That wasn't as bad as its share price return, because it has paid dividends.

A Different Perspective

While the broader market gained around 4.6% in the last year, Almirall shareholders lost 21% (even including dividends) . Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 2.3% 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For example, we've discovered 1 warning sign for Almirall that you should be aware of before investing here.

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 ES exchanges.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

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. Thank you for reading.

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