The worst result, after buying shares in a company (assuming no leverage), would be if you lose all the money you put in. But on the bright side, you can make far more than 100% on a really good stock. For example, the Occidental Petroleum Corporation (NYSE:OXY) share price has soared 286% in the last half decade. Most would be very happy with that. On the other hand, the stock price has retraced 6.3% in the last week. But this could be related to the soft market, with stocks selling off around 1.9% in the last week.
While the stock has fallen 6.3% this week, it’s worth focusing on the longer term and seeing if the stocks historical returns have been driven by the underlying fundamentals.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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).
During the five years of share price growth, Occidental Petroleum moved from a loss to profitability. That kind of transition can be an inflection point that justifies a strong share price gain, just as we have seen here. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. In fact, the Occidental Petroleum stock price is 21% lower in the last three years. Meanwhile, EPS is up 3.8% per year. It would appear there’s a real mismatch between the increasing EPS and the share price, which has declined -7% a year for three years.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
Dive deeper into Occidental Petroleum’s key metrics by checking this interactive graph of Occidental Petroleum’s earnings, revenue and cash flow.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Occidental Petroleum’s TSR for the last 5 years was 301%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Occidental Petroleum shareholders are down 24% for the year (even including dividends), but the market itself is up 16%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 32% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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. Take risks, for example – Occidental Petroleum has 4 warning signs we think you should be aware of.