For many investors, the main point of stock picking is to generate higher returns than the overall market. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Lear Corporation (NYSE:LEA) shareholders have had that experience, with the share price dropping 46% in three years, versus a market return of about 22%. And over the last year the share price fell 27%, so we doubt many shareholders are delighted. Furthermore, it’s down 12% in about a quarter. That’s not much fun for holders. This could be related to the recent financial results – you can catch up on the most recent data by reading our company report.
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.
View our latest analysis for Lear
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 the unfortunate three years of share price decline, Lear actually saw its earnings per share (EPS) improve by 3.0% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Alternatively, growth expectations may have been unreasonable in the past.
It’s pretty reasonable to suspect the market was previously to bullish on the stock, and has since moderated expectations. But it’s possible a look at other metrics will be enlightening.
Revenue is actually up 8.3% over the three years, so the share price drop doesn’t seem to hinge on revenue, either. This analysis is just perfunctory, but it might be worth researching Lear more closely, as sometimes stocks fall unfairly. This could present an opportunity.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
Lear is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. Given we have quite a good number of analyst forecasts, it might be well worth checking out this free chart depicting consensus estimates.
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Lear’s TSR for the last 3 years was -42%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
While the broader market gained around 35% in the last year, Lear shareholders lost 26% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 1.5% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. 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 2 warning signs with Lear , and understanding them should be part of your investment process.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: many of them are unnoticed AND have attractive valuation).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American 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 only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.