Those who invested in Argo Investments (ASX:ARG) five years ago are up 62%
Passive investing in index funds can generate returns that roughly match the broader market. But the truth is that you can make big gains if you buy good quality companies at the right price. For example, the Argo Investments Limited (ASX:ARG) the stock price is 35% higher than it was five years ago, which is above the market average. It’s also good to see that the stock is up 17% in one year.
Let’s take a look at the longer term underlying fundamentals and see if they have been consistent with shareholder returns.
Discover our latest analysis for Argo Investments
In his test The Graham-and-Doddsville super-investors Warren Buffett has described how stock prices don’t always rationally reflect a company’s value. An imperfect but simple way to examine how a company’s market perception has changed is to compare the evolution of earnings per share (EPS) with the movement of the share price.
Earnings per share for Argo Investments are down 5.7% annually, despite a strong five-year share price performance.
This means that the market is unlikely to judge the company based on earnings growth. Since the change in EPS doesn’t seem to correlate with the change in share price, it’s worth taking a look at other metrics.
The decline in revenue of 1.9% per year is not positive. It certainly surprises us that the stock price is up, but perhaps a closer look at the data will provide some answers.
You can see how earnings and income have changed over time in the image below (click on the graph to see exact values).
It’s probably worth noting that the CEO is paid less than the median at companies of a similar size. But while it’s still worth checking out CEO compensation, the really important question is whether the company can increase its profits in the future. Before buying or selling a stock, we always recommend a careful review of historical growth trends, available here.
What about dividends?
In addition to measuring share price performance, investors should also consider total shareholder return (TSR). TSR is a calculation of return that takes into account the value of cash dividends (assuming any dividends received have been reinvested) and the calculated value of all discounted capital raisings and spinoffs. It can be said that the TSR gives a more complete picture of the return generated by a stock. It turns out that Argo Investments’ TSR for the past 5 years was 62%, which exceeds the share price return mentioned earlier. And there’s no price guessing that dividend payouts largely explain the divergence!
A different perspective
It’s nice to see that Argo Investments shareholders have received a 20% total shareholder return over the past year. This includes the dividend. As the one-year TSR is better than the five-year TSR (the latter standing at 10% per year), it seems that the stock’s performance has improved lately. At best, this may hint at genuine trading momentum, implying that now could be a great time to dig deeper. I find it very interesting to look at stock price over the long term as a proxy for company performance. But to really get insight, we also need to consider other information. Example: we have identified 2 warning signs for Argo Investments you should know, and one of them makes us a little uneasy.
We’ll like Argo Investments better if we see big insider buying. In the meantime, watch this free list of growing companies with significant and recent insider buying.
Please note that the market returns quoted in this article reflect the market-weighted average returns of stocks currently trading on AU exchanges.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.