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For many investors, the main point of stock picking is to generate higher returns than the overall market. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term WH Smith PLC (LON:SMWH) shareholders have had that experience, with the share price dropping 38% in three years, versus a market decline of about 9.2%. The more recent news is of little comfort, with the share price down 25% in a year. The falls have accelerated recently, with the share price down 17% in the last three months.
The recent uptick of 5.4% could be a positive sign of things to come, so let's take a look at historical fundamentals.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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).
WH Smith became profitable within the last five years. We would usually expect to see the share price rise as a result. So given the share price is down it's worth checking some other metrics too.
Revenue is actually up 24% over the three years, so the share price drop doesn't seem to hinge on revenue, either. It's probably worth investigating WH Smith further; while we may be missing something on this analysis, there might also be an opportunity.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
WH Smith is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for WH Smith in this interactive graph of future profit estimates.
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. In the case of WH Smith, it has a TSR of -34% for the last 3 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!