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By buying an index fund, investors can approximate the average market return. But if you choose individual stocks with prowess, you can make superior returns. Just take a look at QinetiQ Group plc (LON:QQ.), which is up 34%, over three years, soundly beating the market return of 8.0% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 11%, including dividends.
Since the stock has added UK£75m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
Check out our latest analysis for QinetiQ Group
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. 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.
QinetiQ Group was able to grow its EPS at 27% per year over three years, sending the share price higher. This EPS growth is higher than the 10% average annual increase in the share price. So it seems investors have become more cautious about the company, over time.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We know that QinetiQ Group has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.
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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for QinetiQ Group the TSR over the last 3 years was 43%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
QinetiQ Group shareholders are up 11% for the year (even including dividends). Unfortunately this falls short of the market return. On the bright side, that's still a gain, and it's actually better than the average return of 6% over half a decade It is possible that returns will improve along with the business fundamentals. Before forming an opinion on QinetiQ Group you might want to consider these 3 valuation metrics.