Statistically speaking, long term investing is a profitable endeavour. But unfortunately, some companies simply don't succeed. Zooming in on an example, the The Scotts Miracle-Gro Company (NYSE:SMG) share price dropped 59% in the last half decade. That's not a lot of fun for true believers. And some of the more recent buyers are probably worried, too, with the stock falling 26% in the last year. The falls have accelerated recently, with the share price down 30% in the last three months. But this could be related to the weak market, which is down 13% in the same period.
After losing 5.3% this past week, it's worth investigating the company's fundamentals to see what we can infer from past performance.
We've discovered 2 warning signs about Scotts Miracle-Gro. View them for free.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 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.
We know that Scotts Miracle-Gro has been profitable in the past. On the other hand, it reported a trailing twelve months loss, suggesting it isn't reliably profitable. Other metrics might give us a better handle on how its value is changing over time.
The steady dividend doesn't really explain why the share price is down. However, revenue has declined at a compound annual rate of 3.5% per year. With dividends up, but revenue down, some investors might be concluding that the company is no longer growing.
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?
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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Scotts Miracle-Gro the TSR over the last 5 years was -50%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
While the broader market gained around 6.1% in the last year, Scotts Miracle-Gro shareholders lost 24% (even including dividends). 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. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 9% 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Scotts Miracle-Gro (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.
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 American 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.