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When you buy a stock there is always a possibility that it could drop 100%. But on a lighter note, a good company can see its share price rise well over 100%. One great example is TWC Enterprises Limited (TSE:TWC) which saw its share price drive 121% higher over five years. But it's down 3.4% in the last week.
So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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, TWC Enterprises achieved compound earnings per share (EPS) growth of 56% per year. The EPS growth is more impressive than the yearly share price gain of 17% over the same period. So one could conclude that the broader market has become more cautious towards the stock. The reasonably low P/E ratio of 10.67 also suggests market apprehension.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, TWC Enterprises' TSR for the last 5 years was 132%, 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
TWC Enterprises shareholders gained a total return of 4.6% during the year. But that return falls short of the market. If we look back over five years, the returns are even better, coming in at 18% per year for five years. Maybe the share price is just taking a breather while the business executes on its growth strategy. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example - TWC Enterprises has 1 warning sign we think you should be aware of.