Generally speaking long term investing is the way to go. But no-one is immune from buying too high. Zooming in on an example, the Tornos Holding AG (VTX:TOHN) share price dropped 59% in the last half decade. That is extremely sub-optimal, to say the least.
So let's have a look and see if the longer term performance of the company has been in line with the underlying business' progress.
See our latest analysis for Tornos Holding
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 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.
While the share price declined over five years, Tornos Holding actually managed to increase EPS by an average of 10% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Or possibly, the market was previously very optimistic, so the stock has disappointed, despite improving EPS.
Because of the sharp contrast between the EPS growth rate and the share price growth, we're inclined to look to other metrics to understand the changing market sentiment around the stock.
We note that the dividend has remained healthy, so that wouldn't really explain the share price drop. However, revenue has declined at a compound annual rate of 5.8% per year. With revenue weak, and increased payouts of cash, the market might be taking the view that its best days are behind it.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
We know that Tornos Holding has improved its bottom line over the last three years, but what does the future have in store? It might be well worthwhile taking a look at our free report on how its financial position has changed over time.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. As it happens, Tornos Holding's TSR for the last 5 years was -53%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!