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Passive investing in index funds can generate returns that roughly match the overall market. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). For example, the Servcorp Limited (ASX:SRV) share price is up 57% in the last year, clearly besting the market return of around 28% (not including dividends). If it can keep that out-performance up over the long term, investors will do very well! Zooming out, the stock is actually down 22% in the last three years.
View our latest analysis for Servcorp
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
Over the last twelve months, Servcorp actually shrank its EPS by 77%.
So we don't think that investors are paying too much attention to EPS. Therefore, it seems likely that investors are putting more weight on metrics other than EPS, at the moment.
We haven't seen Servcorp increase dividend payments yet, so the yield probably hasn't helped drive the share higher. It saw it's revenue decline by 11% over twelve months. Usually that correlates with a lower share price, but let's face it, the gyrations of the market are sometimes only as clear as mud.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
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. So we recommend checking out this free report showing consensus forecasts
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, Servcorp's TSR for the last year was 67%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
It's nice to see that Servcorp shareholders have received a total shareholder return of 67% over the last year. That's including the dividend. Notably the five-year annualised TSR loss of 7% per year compares very unfavourably with the recent share price performance. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Servcorp , and understanding them should be part of your investment process.