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 Funkwerk AG (FRA:FEW) shareholders have had that experience, with the share price dropping 48% in three years, versus a market decline of about 12%. The falls have accelerated recently, with the share price down 12% in the last three months.
With that in mind, it’s worth seeing if the company’s underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
See our latest analysis for Funkwerk
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. 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, Funkwerk actually saw its earnings per share (EPS) improve by 8.5% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Or else the company was over-hyped in the past, and so its growth has disappointed.
It’s worth taking a look at other metrics, because the EPS growth doesn’t seem to match with the falling share price.
We note that the dividend seems healthy enough, so that probably doesn’t explain the share price drop. It’s good to see that Funkwerk has increased its revenue over the last three years. If the company can keep growing revenue, there may be an opportunity for investors. You might have to dig deeper to understand the recent share price weakness.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
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 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 Funkwerk the TSR over the last 3 years was -40%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
Investors in Funkwerk had a tough year, with a total loss of 10.0% (including dividends), against a market gain of about 7.4%. 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 2% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It’s always interesting to track share price performance over the longer term. But to understand Funkwerk better, we need to consider many other factors. Case in point: We’ve spotted 2 warning signs for Funkwerk you should be aware of, and 1 of them is potentially serious.
For those who like to find winning investments this free list of undervalued companies with recent insider purchasing, could 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 German 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.
