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If you want to compound wealth in the stock market, you can do so by buying an index fund. But in our experience, buying the right stocks can give your wealth a significant boost. For example, the Otter Tail Corporation (NASDAQ:OTTR) share price is 92% higher than it was five years ago, which is more than the market average. Zooming in, the stock is actually down 11% in the last year.
After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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.
During five years of share price growth, Otter Tail achieved compound earnings per share (EPS) growth of 27% per year. This EPS growth is higher than the 14% average annual increase in the share price. So one could conclude that the broader market has become more cautious towards the stock. This cautious sentiment is reflected in its (fairly low) P/E ratio of 11.25.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
This free interactive report on Otter Tail's earnings, revenue and cash flow 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. We note that for Otter Tail the TSR over the last 5 years was 119%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
Investors in Otter Tail had a tough year, with a total loss of 8.6% (including dividends), against a market gain of about 11%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Longer term investors wouldn't be so upset, since they would have made 17%, 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 Otter Tail better, we need to consider many other factors. Take risks, for example - Otter Tail has 2 warning signs (and 1 which can't be ignored) we think you should know about.