Investors in Italtile (JSE:ITE) have unfortunately lost 35% over the last three years
In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Italtile Limited (JSE:ITE) shareholders have had that experience, with the share price dropping 44% in three years, versus a market decline of about 14%. The more recent news is of little comfort, with the share price down 24% in a year. The falls have accelerated recently, with the share price down 15% 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.
Check out our latest analysis for Italtile
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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).
Although the share price is down over three years, Italtile actually managed to grow EPS by 6.3% per year in that time. 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.
Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.
It's quite likely that the declining dividend has caused some investors to sell their shares, pushing the price lower in the process. In contrast it does not seem particularly likely that the revenue levels are a concern for investors.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Take a more thorough look at Italtile's financial health with this free report on its balance sheet.
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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Italtile, it has a TSR of -35% for the last 3 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
Investors in Italtile had a tough year, with a total loss of 21% (including dividends), against a market gain of about 0.6%. 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 3% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. It's always interesting to track share price performance over the longer term. But to understand Italtile better, we need to consider many other factors. For instance, we've identified 1 warning sign for Italtile that you should be aware of.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on South African 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.