When we invest, we’re generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, the Leon’s Furniture Limited (TSE:LNF) share price is up 54% in the last 5 years, clearly besting the market return of around 44% (ignoring dividends). On the other hand, the more recent gains haven’t been so impressive, with shareholders gaining just 22%, including dividends.
So let’s investigate and see if the longer term performance of the company has been in line with the underlying business’ progress.
View our latest analysis for Leon’s Furniture
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just 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.
During five years of share price growth, Leon’s Furniture achieved compound earnings per share (EPS) growth of 7.1% per year. This EPS growth is slower than the share price growth of 9% per year, over the same period. So it’s fair to assume the market has a higher opinion of the business than it did five years ago. And that’s hardly shocking given the track record of growth.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. We note that for Leon’s Furniture the TSR over the last 5 years was 93%, 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!
Leon’s Furniture shareholders have received returns of 22% over twelve months (even including dividends), which isn’t far from the general market return. Most would be happy with a gain, and it helps that the year’s return is actually better than the average return over five years, which was 14%. Even if the share price growth slows down from here, there’s a good chance that this is business worth watching in the long term. 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. Case in point: We’ve spotted 1 warning sign for Leon’s Furniture you should be aware of.
