These days it's easy to simply buy an index fund, and your returns should (roughly) match the market. But the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the Z Energy Limited (NZSE:ZEL) share price is up 56% in the last five years, slightly above the market return. In stark contrast, the stock price has actually fallen 18% in the last year.
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Check out our latest analysis for Z Energy
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).
During five years of share price growth, Z Energy achieved compound earnings per share (EPS) growth of 3.8% per year. This EPS growth is lower than the 9.3% average annual increase in the share price. 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 graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It is of course excellent to see how Z Energy has grown profits over the years, but the future is more important for shareholders. You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Z Energy, it has a TSR of 107% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Z Energy shareholders are down 11% for the year (even including dividends), but the market itself is up 16%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 16% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. Before spending more time on Z Energy it might be wise to click here to see if insiders have been buying or selling shares.