In This Article:
We believe investing is smart because history shows that stock markets go higher in the long term. But not every stock you buy will perform as well as the overall market. For example, the Wesfarmers Limited (ASX:WES), share price is up over the last year, but its gain of 24% trails the market return. Having said that, the longer term returns aren't so impressive, with stock gaining just 12% in three years.
While this past week has detracted from the company's one-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.
See our latest analysis for Wesfarmers
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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).
Wesfarmers was able to grow EPS by 47% in the last twelve months. It's fair to say that the share price gain of 24% did not keep pace with the EPS growth. Therefore, it seems the market isn't as excited about Wesfarmers as it was before. This could be an opportunity.
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. It might be well worthwhile taking a look at our free report on Wesfarmers' earnings, revenue and cash flow.
What About Dividends?
As well as measuring the share price return, investors should also consider the 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Wesfarmers the TSR over the last 1 year was 28%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Wesfarmers' TSR for the year was broadly in line with the market average, at 28%. Most would be happy with a gain, and it helps that the year's return is actually better than the average return over five years, which was 17%. Even if the share price growth slows down from here, there's a good chance that this is business worth watching in the long term. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Case in point: We've spotted 1 warning sign for Wesfarmers you should be aware of.