Advertisement
New Zealand markets closed
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NZD/USD

    0.5983
    -0.0022 (-0.37%)
     
  • NZD/EUR

    0.5538
    -0.0005 (-0.09%)
     
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • OIL

    82.78
    +1.43 (+1.76%)
     
  • GOLD

    2,242.70
    +30.00 (+1.36%)
     
  • NASDAQ

    18,242.58
    -38.26 (-0.21%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,761.78
    +1.70 (+0.00%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • NZD/JPY

    90.5050
    -0.2750 (-0.30%)
     

Did Compass Group's (LON:CPG) Share Price Deserve to Gain 88%?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Compass Group PLC (LON:CPG) share price is up 88% in the last 5 years, clearly besting than the market return of around 7.0% (ignoring dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 24%, including dividends.

View our latest analysis for Compass Group

ADVERTISEMENT

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 flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

During five years of share price growth, Compass Group achieved compound earnings per share (EPS) growth of 22% per year. This EPS growth is higher than the 13% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

LSE:CPG Past and Future Earnings, July 10th 2019
LSE:CPG Past and Future Earnings, July 10th 2019

We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. Dive deeper into the earnings by checking this interactive graph of Compass Group's earnings, revenue and cash flow.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Compass Group's TSR for the last 5 years was 119%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

It's nice to see that Compass Group shareholders have received a total shareholder return of 24% over the last year. Of course, that includes the dividend. That gain is better than the annual TSR over five years, which is 17%. Therefore it seems like sentiment around the company has been positive lately. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. If you want to research this stock further, the data on insider buying is an obvious place to start. You can click here to see who has been buying shares - and the price they paid.

Compass Group is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing 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 GB exchanges.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.