When you buy shares in a company, it’s worth keeping in mind the possibility that it could fail, and you could lose your money. But on the bright side, if you buy shares in a high quality company at the right price, you can gain well over 100%. One great example is Old Dominion Freight Line, Inc. (NASDAQ:ODFL) which saw its share price drive 174% higher over five years. And in the last week the share price has popped 5.6%.
After a strong gain in the past week, it’s worth seeing if longer term returns have been driven by improving fundamentals.
There is no denying that markets are sometimes efficient, but prices do not always reflect 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, Old Dominion Freight Line achieved compound earnings per share (EPS) growth of 17% per year. This EPS growth is lower than the 22% average annual increase in the share price. 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).
It’s good to see that there was some significant insider buying in the last three months. That’s a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. 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. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Old Dominion Freight Line the TSR over the last 5 years was 180%, 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!
Investors in Old Dominion Freight Line had a tough year, with a total loss of 22% (including dividends), against a market gain of about 9.5%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn’t be so upset, since they would have made 23%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We’ve identified 1 warning sign with Old Dominion Freight Line , and understanding them should be part of your investment process.
