In order to justify the effort of selecting individual stocks, it’s worth striving to beat the returns from a market index fund. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Stepan Company (NYSE:SCL) shareholders have had that experience, with the share price dropping 44% in three years, versus a market return of about 64%. And more recent buyers are having a tough time too, with a drop of 34% in the last year.

Since shareholders are down over the longer term, lets look at the underlying fundamentals over the that time and see if they’ve been consistent with returns.

Trump has pledged to “unleash” American oil and gas and these 15 US stocks have developments that are poised to benefit.

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 three years that the share price fell, Stepan’s earnings per share (EPS) dropped by 26% each year. This fall in the EPS is worse than the 17% compound annual share price fall. This suggests that the market retains some optimism around long term earnings stability, despite past EPS declines.

The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).

We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. This free interactive report on Stepan’s earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Stepan, it has a TSR of -40% 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!

While the broader market gained around 13% in the last year, Stepan shareholders lost 33% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 6% over the last half decade. We realise that Baron Rothschild has said investors should “buy when there is blood on the streets”, but we caution that investors should first be sure they are buying a high quality business. It’s always interesting to track share price performance over the longer term. But to understand Stepan better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We’ve identified 2 warning signs with Stepan (at least 1 which is significant) , and understanding them should be part of your investment process.