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Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. That downside risk was realized by Morgan Advanced Materials plc (LON:MGAM) shareholders over the last year, as the share price declined 37%. That contrasts poorly with the market return of 6.4%. Longer term shareholders haven't suffered as badly, since the stock is down a comparatively less painful 28% in three years. Shareholders have had an even rougher run lately, with the share price down 28% in the last 90 days.
So let's have a look and see if the longer term performance of the company has been in line with the underlying business' progress.
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There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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.
During the unfortunate twelve months during which the Morgan Advanced Materials share price fell, it actually saw its earnings per share (EPS) improve by 7.8%. It could be that the share price was previously over-hyped.
The divergence between the EPS and the share price is quite notable, during the year. But we might find some different metrics explain the share price movements better.
We don't see any weakness in the Morgan Advanced Materials' dividend so the steady payout can't really explain the share price drop. From what we can see, revenue is pretty flat, so that doesn't really explain the share price drop. Unless, of course, the market was expecting a revenue uptick.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
This free interactive report on Morgan Advanced Materials' balance sheet strength is a great place to start, if you want to investigate the stock further.
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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Morgan Advanced Materials' TSR for the last 1 year was -33%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.