We think intelligent long term investing is the way to go. But that doesn't mean long term investors can avoid big losses. To wit, the The Goodyear Tire & Rubber Company (NASDAQ:GT) share price managed to fall 64% over five long years. We certainly feel for shareholders who bought near the top. And we doubt long term believers are the only worried holders, since the stock price has declined 46% over the last twelve months. Furthermore, it's down 19% in about a quarter. That's not much fun for holders.
It's worthwhile assessing if the company's economics have been moving in lockstep with these underwhelming shareholder returns, or if there is some disparity between the two. So let's do just that.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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 the five years over which the share price declined, Goodyear Tire & Rubber's earnings per share (EPS) dropped by 5.2% each year. Readers should note that the share price has fallen faster than the EPS, at a rate of 19% per year, over the period. This implies that the market was previously too optimistic about the stock. The low P/E ratio of 3.69 further reflects this reticence.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We know that Goodyear Tire & Rubber has improved its bottom line over the last three years, but what does the future have in store? Take a more thorough look at Goodyear Tire & Rubber's financial health with this free report on its balance sheet.
What About The Total Shareholder Return (TSR)?
Investors should note that there's a difference between Goodyear Tire & Rubber's total shareholder return (TSR) and its share price change, which we've covered above. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. Dividends have been really beneficial for Goodyear Tire & Rubber shareholders, and that cash payout explains why its total shareholder loss of 62%, over the last 5 years, isn't as bad as the share price return.
A Different Perspective
We regret to report that Goodyear Tire & Rubber shareholders are down 46% for the year. Unfortunately, that's worse than the broader market decline of 14%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 10% per year over five years. 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. It's always interesting to track share price performance over the longer term. But to understand Goodyear Tire & Rubber better, we need to consider many other factors. Even so, be aware that Goodyear Tire & Rubber is showing 1 warning sign in our investment analysis , you should know about...
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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.
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