Generally, the goal of active stock selection is to find companies that provide returns above the market average. And while aggressive stock selection involves risk (requires diversification), it can also yield excess returns.For example, in the long run Macquarie Group Limited (ASX:MQG) shareholders have enjoyed a 51% share price increase over the past five years, well above the market return of around 23% (not including dividends). However, recent returns haven't been as impressive, with the share price returning just 6.3% over the last year, including dividends.
Let's look at the underlying fundamentals over the long term and see if they are aligned with shareholder returns.
Check out our latest analysis for Macquarie Group.
To paraphrase Benjamin Graham, in the short term the market is a voting machine, but in the long term it is a weighing machine. One imperfect but simple way to consider how the market perception of a company has changed is to compare the change in the earnings per share (EPS) with the share price movement.
During the five-year period of share price growth, Macquarie Group achieved compound earnings per share (EPS) growth of 7.9% per year. This EPS growth is quite close to the average annual increase in the share price of 9%. This suggests that market sentiment surrounding the company hasn't changed much over that time. In fact, share prices seem to be responding to EPS.
You can see below how EPS has changed over time (unveil the exact values by clicking on the image).
We like to see that insiders have made significant purchases in the last year. Even so, future profits will be far more important than whether current shareholders make money.It might be well worth taking a look at ours free Report on Macquarie Group's earnings, revenue and cash flow.
What will happen to the dividend?
When looking at return on investment, it is important to consider the following differences: Total shareholder return (TSR) and stock price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. Coincidentally, Macquarie Group's TSR over the past five years was 82%, which is better than the share price return mentioned above. And there's no kudos to speculating that dividend payments are the main explanation for the divergence.
different perspective
Macquarie Group shareholders grew 6.3% over the year (even including dividends). However, its returns are below the market. Looking back over five years, the return is even better, at 13% per year over five years. Perhaps the stock is taking a breather while the company executes its growth strategy. 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 discovered 1 warning sign for Macquarie Group you should know.
Macquarie Group isn't the only stock that insiders are buying.For people who like searching succeed in investing this free This list of growing companies with recent insider purchasing may be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Australian exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
