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Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, long term JB Hi-Fi Limited (ASX:JBH) shareholders have enjoyed a 89% share price rise over the last half decade, well in excess of the market return of around 16% (not 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 JB Hi-Fi
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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, JB Hi-Fi achieved compound earnings per share (EPS) growth of 24% per year. This EPS growth is higher than the 14% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company. The reasonably low P/E ratio of 8.28 also suggests market apprehension.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We know that JB Hi-Fi has improved its bottom line over the last three years, but what does the future have in store? This free interactive report on JB Hi-Fi's balance sheet strength is a great place to start, if you want to investigate the stock further.
What About Dividends?
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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, JB Hi-Fi's TSR for the last 5 years was 152%, 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
Investors in JB Hi-Fi had a tough year, with a total loss of 9.1% (including dividends), against a market gain of about 0.3%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 20% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with JB Hi-Fi (at least 2 which can't be ignored) , and understanding them should be part of your investment process.