The simplest way to invest in stocks is to buy exchange traded funds. But you can do a lot better than that by buying good quality businesses for attractive prices. For example, the Sonic Automotive, Inc. (NYSE:SAH) share price is up 90% in the last five years, slightly above the market return. It's fair to say the stock has continued its long term trend in the last year, over which it has risen 20%.
In light of the stock dropping 4.7% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive five-year return.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 last half decade, Sonic Automotive became profitable. That would generally be considered a positive, so we'd hope to see the share price to rise.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We know that Sonic Automotive has improved its bottom line lately, but is it going to grow revenue? Check if analysts think Sonic Automotive will grow revenue in the future.
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. We note that for Sonic Automotive the TSR over the last 5 years was 107%, 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
Sonic Automotive provided a TSR of 23% over the last twelve months. But that return falls short of the market. The silver lining is that the gain was actually better than the average annual return of 16% per year over five year. This could indicate that the company is winning over new investors, as it pursues its strategy. It's always interesting to track share price performance over the longer term. But to understand Sonic Automotive better, we need to consider many other factors. To that end, you should learn about the 2 warning signs we've spotted with Sonic Automotive (including 1 which is concerning) .
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.
