Investors can buy low cost index fund if they want to receive the average market return. But if you invest in individual stocks, some are likely to underperform. That’s what has happened with the International Business Machines Corporation (NYSE:IBM) share price. It’s up 11% over three years, but that is below the market return. Zooming in, the stock is up a respectable 8.6% in the last year.
After a strong gain in the past week, it’s worth seeing if longer term returns have been driven by improving fundamentals.
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 way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).
Over the last three years, International Business Machines failed to grow earnings per share, which fell 35% (annualized).
Earnings per share have melted like a stack of ice cubes, in stark contrast to the share price. So we’ll need to take a look at some different metrics to try to understand why the share price remains solid.
Interestingly, the dividend has increased over time; so that may have given the share price a boost. It could be that the company is reaching maturity and dividend investors are buying for the yield.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money.