When you buy and hold a stock for the long term, you definitely want it to provide a positive return. Furthermore, you’d generally like to see the share price rise faster than the market. But City Lodge Hotels Limited (JSE:CLH) has fallen short of that second goal, with a share price rise of 39% over five years, which is below the market return. The last year has been disappointing, with the stock price down 5.3% in that time.

With that in mind, it’s worth seeing if the company’s underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.

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In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.

During the five years of share price growth, City Lodge Hotels moved from a loss to profitability. That’s generally thought to be a genuine positive, so investors may expect to see an increasing share price. Since the company was unprofitable five years ago, but not three years ago, it’s worth taking a look at the returns in the last three years, too. We can see that the City Lodge Hotels share price is down 4.2% in the last three years. Meanwhile, EPS is up 40% per year. It would appear there’s a real mismatch between the increasing EPS and the share price, which has declined -1.4% a year for three years.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.

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. In the case of City Lodge Hotels, it has a TSR of 53% for the last 5 years. That exceeds its share price return that we previously mentioned. And there’s no prize for guessing that the dividend payments largely explain the divergence!

Investors in City Lodge Hotels had a tough year, with a total loss of 1.7% (including dividends), against a market gain of about 29%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn’t be so upset, since they would have made 9%, each year, over five years. 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. Even so, be aware that City Lodge Hotels is showing 1 warning sign in our investment analysis , you should know about…