Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, long term Discovery Limited (JSE:DSY) shareholders have enjoyed a 44% share price rise over the last half decade, well in excess of the market return of around 19% (not including dividends).
Now it’s worth having a look at the company’s fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.
Check out our latest analysis for Discovery
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 way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).
During five years of share price growth, Discovery achieved compound earnings per share (EPS) growth of 1.5% per year. This EPS growth is lower than the 8% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. And that’s hardly shocking given the track record of growth.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
It is of course excellent to see how Discovery has grown profits over the years, but the future is more important for shareholders. You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Discovery the TSR over the last 5 years was 49%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
We’re pleased to report that Discovery shareholders have received a total shareholder return of 37% over one year. That’s including the dividend. That’s better than the annualised return of 8% over half a decade, implying that the company is doing better recently. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. 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. For example, we’ve discovered 1 warning sign for Discovery that you should be aware of before investing here.
