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Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, long term Croda International Plc (LON:CRDA) shareholders have enjoyed a 90% share price rise over the last half decade, well in excess of the market return of around -0.2% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 9.3%, including dividends.
Check out our latest analysis for Croda International
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 flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
Over half a decade, Croda International managed to grow its earnings per share at 5.9% a year. This EPS growth is slower than the share price growth of 14% per year, over the same period. This suggests that market participants hold the company in higher regard, these days. And that's hardly shocking given the track record of growth.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
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 or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Croda International's TSR for the last 5 years was 124%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
We're pleased to report that Croda International shareholders have received a total shareholder return of 9.3% over one year. That's including the dividend. Having said that, the five-year TSR of 18% a year, is even better. The pessimistic view would be that be that the stock has its best days behind it, but on the other hand the price might simply be moderating while the business itself continues to execute. 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.