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Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And in our experience, buying the right stocks can give your wealth a significant boost. For example, long term Porvair plc (LON:PRV) shareholders have enjoyed a 12% share price rise over the last half decade, well in excess of the market return of around 5.1% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 6.7%, including dividends.
With that in mind, it's worth seeing if the company's underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
See our latest analysis for Porvair
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 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, Porvair achieved compound earnings per share (EPS) growth of 7.0% per year. The EPS growth is more impressive than the yearly share price gain of 2% over the same period. So one could conclude that the broader market has become more cautious towards the stock.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
Dive deeper into Porvair's key metrics by checking this interactive graph of Porvair's earnings, revenue and cash flow.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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, Porvair's TSR for the last 5 years was 18%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Porvair provided a TSR of 6.7% over the last twelve months. But that return falls short of the market. The silver lining is that the gain was actually better than the average annual return of 3% per year over five year. It is possible that returns will improve along with the business fundamentals. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Porvair has 1 warning sign we think you should be aware of.