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Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. For example, the Pangaea Logistics Solutions, Ltd. (NASDAQ:PANL) share price is down 22% in the last year. That's disappointing when you consider the market returned 12%. At least the damage isn't so bad if you look at the last three years, since the stock is down 14% in that time. There was little comfort for shareholders in the last week as the price declined a further 3.5%.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
Unfortunately Pangaea Logistics Solutions reported an EPS drop of 32% for the last year. This fall in the EPS is significantly worse than the 22% the share price fall. So despite the weak per-share profits, some investors are probably relieved the situation wasn't more difficult.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It is of course excellent to see how Pangaea Logistics Solutions has grown profits over the years, but the future is more important for shareholders. This free interactive report on Pangaea Logistics Solutions's balance sheet strength is a great place to start, if you want to investigate the stock further.
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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Pangaea Logistics Solutions's TSR for the last year was -20%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Investors in Pangaea Logistics Solutions had a tough year, with a total loss of 20% (including dividends) , against a market gain of about 12%. 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 0.7% per year over five years. We realise that Buffett has said investors should 'buy when there is blood on the streets', but we caution that investors should first be sure they are buying a high quality business. 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. Take risks, for example - Pangaea Logistics Solutions has 3 warning signs we think you should be aware of.
If you are like me, then you will 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 US exchanges.
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.
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