One simple way to benefit from the stock market is to buy an index fund. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. Just take a look at Hewlett Packard Enterprise Company (NYSE:HPE), which is up 40%, over three years, soundly beating the market return of 25% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 29% in the last year, including dividends.
Since the long term performance has been good but there's been a recent pullback of 4.0%, let's check if the fundamentals match the share price.
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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
Hewlett Packard Enterprise was able to grow its EPS at 22% per year over three years, sending the share price higher. This EPS growth is higher than the 12% average annual increase in the share price. Therefore, it seems the market has moderated its expectations for growth, somewhat.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Hewlett Packard Enterprise has improved its bottom line lately, but is it going to grow revenue? You could check out this free report showing analyst revenue forecasts.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Hewlett Packard Enterprise the TSR over the last 3 years was 53%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
Hewlett Packard Enterprise shareholders gained a total return of 29% during the year. But that was short of the market average. On the bright side, that's still a gain, and it's actually better than the average return of 10% over half a decade This suggests the company might be improving over time. 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. Even so, be aware that Hewlett Packard Enterprise 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 undervalued small caps 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 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.
