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If you want to compound wealth in the stock market, you can do so by buying an index fund. But the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the PulteGroup, Inc. (NYSE:PHM) share price is up 43% in the last five years, slightly above the market return. In stark contrast, the stock price has actually fallen 18% in the last year.
Now it's worth having a look at the company's fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.
Check out our latest analysis for PulteGroup
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.
Over half a decade, PulteGroup managed to grow its earnings per share at 40% a year. The EPS growth is more impressive than the yearly share price gain of 7% over the same period. 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 4.07.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
It is of course excellent to see how PulteGroup has grown profits over the years, but the future is more important for shareholders. You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of PulteGroup, it has a TSR of 53% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Although it hurts that PulteGroup returned a loss of 16% in the last twelve months, the broader market was actually worse, returning a loss of 22%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 9% for each year. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. It's always interesting to track share price performance over the longer term. But to understand PulteGroup better, we need to consider many other factors. For instance, we've identified 1 warning sign for PulteGroup that you should be aware of.