In order to justify the effort of selecting individual stocks, it’s worth striving to beat the returns from a market index fund. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. We regret to report that long term STV Group plc (LON:STVG) shareholders have had that experience, with the share price dropping 50% in three years, versus a market return of about 15%. And the ride hasn’t got any smoother in recent times over the last year, with the price 31% lower in that time. The falls have accelerated recently, with the share price down 19% in the last three months.

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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To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. 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.

STV Group saw its EPS decline at a compound rate of 18% per year, over the last three years. This change in EPS is reasonably close to the 21% average annual decrease in the share price. So it seems like sentiment towards the stock hasn’t changed all that much over time. Rather, the share price has approximately tracked EPS growth.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

We know that STV Group has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.

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. We note that for STV Group the TSR over the last 3 years was -42%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

STV Group shareholders are down 27% for the year (even including dividends), but the market itself is up 5.2%. 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. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 4% per year over five years. 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. 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 – STV Group has 5 warning signs (and 2 which are potentially serious) we think you should know about.