If you're building a properly diversified portfolio of stocks, there's a good chance that some of the stocks you select will perform poorly. Long term Advance Auto Parts, Inc. (NYSE:AAP) shareholders know this all too well, as the share price has fallen sharply over three years. Unfortunately, they've held on through a 70% drop in the share price in that time. Shareholders have had an even tougher time recently, with the share price down 26% in the last 90 days.
After a 3.7% drop last week, it's worth examining the company's fundamentals to see what we can infer from past performance.
Read our latest analysis for Advance Auto Parts
To paraphrase Benjamin Graham, “In the short run, the market is a voting machine, but in the long run it's a weighing machine.” 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 three years that the stock price declined, Advance Auto Parts' earnings per share (EPS) fell 66% annually. In comparison, a compound annual decline of 33% in the stock price isn't as bad as the decline in EPS. Therefore, the market may not be too worried about the EPS numbers at this point. Or, it may have already priced in some of the decline. With a P/E ratio of 176.21, it's fair to say the market sees a bright future for the company.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
Earnings per Share Growth
It's good to see that insiders have been buying shares in the last twelve months. Still, future earnings are much more important to whether current shareholders will make money. Before buying or selling shares, we always recommend a closer look at historic growth trends, which you can find here.
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, as well as dividends, based on the assumption that the dividends are reinvested. As such, for companies that pay large dividends, the TSR will often be a lot higher than the share price return. Coincidentally, Advance Auto Parts' TSR for the last 3 years was -68%, which exceeds the share price return mentioned above. This is mainly due to the dividend payments.
A different perspective
Advance Auto Parts investors have had a tough year this year. The stock has lost a total of 8.5% (including dividends) while the market has risen about 23%. However, keep in mind that even the best stocks can underperform the market over a twelve month period. Unfortunately, longer term shareholders have been hit harder, given the loss of 9% over the last five years. We need clear information to show that the company will grow before we take the view that the share price will stabilize. While it's well worth considering the different impacts that market conditions can have on share prices, there are other factors that are even more important. Consider, for example, the ever-present threat of investment risk. We've noticed 3 warning signs with Advance Auto Parts (at least 1 which isn't very cogent to us). Understanding these should be part of your investment process.
The story continues
There are plenty of other companies where insiders have been buying up shares, so you probably don't want to miss this free list of undervalued small companies 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 US exchanges.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
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