The maximum you can lose on any stock (assuming you are not using leverage) is 100% of your money. But if you buy shares of a very large company, you can After than double your money. For example the ARC DocumentSolutions, Inc. (NYSE: ARC) the stock price is 108% higher than it was three years ago. Most would be happy with it. Last week, the share price fell by some 2.6%.
So let’s examine and see if the long-term performance of the business has been consistent with the progress of the underlying business.
While markets are a powerful pricing mechanism, stock prices reflect investor sentiment, not just underlying trading performance. One way to look at how market sentiment has changed over time is to look at the interaction between a company’s stock price and its earnings per share (EPS).
ARC Document Solutions was able to increase its EPS by 30% per year over three years, driving up the share price. We note that the (average) annual share price gain of 28% is not far off the rate of EPS growth. Chance? Probably not. This suggests that sentiment and expectations have not changed drastically. On the contrary, the share price roughly followed EPS growth.
The company’s earnings per share (over time) is shown in the image below (click to see exact numbers).
We consider it positive that insiders have made significant purchases over the past year. Even so, future earnings will be far more important to whether current shareholders are making money. Dive deeper into revenue by viewing this interactive revenue, revenue, and cash flow chart from ARC Document Solutions.
What about dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price performance. The TSR incorporates the value of any spin-offs or discounted capital increases, as well as any dividends, on the basis of the assumption that dividends are reinvested. It can be said that the TSR gives a more complete picture of the return generated by a stock. In the case of ARC Document Solutions, it has a TSR of 130% for the last 3 years. This exceeds the performance of its share price that we mentioned earlier. This is largely the result of its dividend payments!
A different perspective
It’s good to see that ARC Document Solutions has rewarded shareholders with a 10% total shareholder return over the past twelve months. This includes the dividend. Notably, the five-year annualized TSR loss of 1.3% per year compares very unfavorably to recent share price performance. The long-term loss makes us cautious, but the short-term TSR gain certainly points to a brighter future. I find it very interesting to look at stock price over the long term as a proxy for company performance. But to really get insight, we also need to consider other information. Consider the risks, for example. Every business has them, and we’ve spotted 1 warning sign for ARC Document Solutions you should know.
ARC Document Solutions isn’t the only stock insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider buying, might be just the ticket.
Please note that the market returns quoted in this article reflect the average market-weighted returns of stocks currently trading on US exchanges.
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