In order to justify the effort of selecting individual stocks, it’s worth striving to beat the returns from a market index fund. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. Unfortunately, that’s been the case for longer term Exxaro Resources Limited (JSE:EXX) shareholders, since the share price is down 37% in the last three years, falling well short of the market decline of around 16%. On the other hand the share price has bounced 7.2% over the last week. The buoyant market could have helped drive the share price pop, since stocks are up 4.5% in the same period.

While the stock has risen 7.2% in the past week but long term shareholders are still in the red, let’s see what the fundamentals can tell us.

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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. 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 three years that the share price fell, Exxaro Resources’ earnings per share (EPS) dropped by 11% each year. This reduction in EPS is slower than the 14% annual reduction in the share price. So it seems the market was too confident about the business, in the past. The less favorable sentiment is reflected in its current P/E ratio of 4.61.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

It’s probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Dive deeper into the earnings by checking this interactive graph of Exxaro Resources’ earnings, revenue and cash flow.

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Exxaro Resources, it has a TSR of -6.8% for the last 3 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!