In This Article:
Investors can approximate the average market return by buying an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. For example, the Ford Motor Company (NYSE:F) share price is down 32% in the last year. That falls noticeably short of the market return of around 10%. The silver lining (for longer term investors) is that the stock is still 15% higher than it was three years ago. The falls have accelerated recently, with the share price down 19% in the last three months. We note that the company has reported results fairly recently; and the market is hardly delighted. You can check out the latest numbers in our company report.
Since Ford Motor has shed US$2.8b from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.
See our latest analysis for Ford Motor
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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
Ford Motor managed to increase earnings per share from a loss to a profit, over the last 12 months.
The result looks like a strong improvement to us, so we're surprised the market has sold down the shares. If the company can sustain the earnings growth, this might be an inflection point for the business, which would make right now a really interesting time to study it more closely.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. As it happens, Ford Motor's TSR for the last 1 year was -24%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Investors in Ford Motor had a tough year, with a total loss of 24% (including dividends), against a market gain of about 10%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 6%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand Ford Motor better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Ford Motor (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.