When we invest, we’re generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. To wit, the Grafton Group share price has climbed 59% in five years, easily topping the market return of 28% (ignoring dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 7.1% in the last year, including dividends.

So let’s investigate and see if the longer term performance of the company has been in line with the underlying business’ progress.

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While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During five years of share price growth, Grafton Group achieved compound earnings per share (EPS) growth of 0.7% per year. This EPS growth is lower than the 10% average annual increase in the share price. So it’s fair to assume the market has a higher opinion of the business than it did five years ago. That’s not necessarily surprising considering the five-year track record of earnings growth.

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

It’s good to see that there was some significant insider buying in the last three months. That’s a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. It might be well worthwhile taking a look at our free report on Grafton Group’s earnings, revenue and cash flow.

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Grafton Group, it has a TSR of 89% for the last 5 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.

We’re pleased to report that Grafton Group shareholders have received a total shareholder return of 7.1% over one year. And that does include the dividend. However, the TSR over five years, coming in at 14% per year, is even more impressive. The pessimistic view would be that be that the stock has its best days behind it, but on the other hand the price might simply be moderating while the business itself continues to execute. Investors who like to make money usually check up on insider purchases, such as the price paid, and total amount bought. You can find out about the insider purchases of Grafton Group by clicking this link.