When you buy a stock there is always a possibility that it could drop 100%. But on the bright side, if you buy shares in a high quality company at the right price, you can gain well over 100%. For example, the Microsoft Corporation (NASDAQ:MSFT) share price has soared 263% in the last half decade. Most would be very happy with that. Unfortunately, though, the stock has dropped 6.3% over a week. However, this might be related to the overall market decline of 3.4% in a week.
Although Microsoft has shed US$135b from its market cap this week, let’s take a look at its longer term fundamental trends and see if they’ve driven returns.
See our latest analysis for Microsoft
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 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, Microsoft achieved compound earnings per share (EPS) growth of 24% per year. So the EPS growth rate is rather close to the annualized share price gain of 29% per year. That suggests that the market sentiment around the company hasn’t changed much over that time. Rather, the share price has approximately tracked EPS growth.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
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. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Microsoft, it has a TSR of 286% for the last 5 years. That exceeds its share price return that we previously mentioned. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
While it’s certainly disappointing to see that Microsoft shares lost 9.8% throughout the year, that wasn’t as bad as the market loss of 15%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 31% for each year. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.
Microsoft 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 US exchanges.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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