It’s easy to match the overall 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. That downside risk was realized by DS Smith Plc (LON:SMDS) shareholders over the last year, as the share price declined 31%. That contrasts poorly with the market return of 3.1%. However, the longer term returns haven’t been so bad, with the stock down 11% in the last three years. The silver lining is that the stock is up 1.2% in about a week.
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).
Even though the DS Smith share price is down over the year, its EPS actually improved. It could be that the share price was previously over-hyped. The divergence between the EPS and the share price is quite notable, during the year. So it’s well worth checking out some other metrics, too.
Vibrant companies don’t usually cut their dividends, so the recent reduction might help explain why the DS Smith share price has been weak.
You can see how revenue and earnings have changed over time in the image below, (click on the chart to see cashflow).
It’s good to see that there was some significant insider buying in the last three months. That’s a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. So it makes a lot of sense to check out what analysts think DS Smith will earn in the future (free profit forecasts)
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, DS Smith’s TSR for the last year was -24%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Investors in DS Smith had a tough year, with a total loss of 24% (including dividends), against a market gain of about 3.1%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn’t be so upset, since they would have made 6.3%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. If you want to research this stock further, the data on insider buying is an obvious place to start. You can click here to see who has been buying shares – and the price they paid.
DS Smith is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB 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.