Vanguard founder Jack Bogle helped spearhead the low-cost index fund, putting average returns within reach of every investor. But you can make superior returns by picking better-than average stocks. For example, the Fastenal Company (NASDAQ:FAST) share price is up 72% in the last three years, slightly above the market return. Zooming in, the stock is up a respectable 17% in the last year.
Since it’s been a strong week for Fastenal shareholders, let’s have a look at trend of the longer term fundamentals.
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.
Fastenal was able to grow its EPS at 4.6% per year over three years, sending the share price higher. In comparison, the 20% per year gain in the share price outpaces the EPS growth. This indicates that the market is feeling more optimistic on the stock, after the last few years of progress. It’s not unusual to see the market ‘re-rate’ a stock, after a few years of growth.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
It’s probably worth noting we’ve seen significant insider buying in the last quarter, which we consider a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Fastenal, it has a TSR of 85% 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!
Fastenal shareholders have received returns of 20% over twelve months (even including dividends), which isn’t far from the general market return. That gain looks pretty satisfying, and it is even better than the five-year TSR of 13% per year. It is possible that management foresight will bring growth well into the future, even if the share price slows down. I find it very interesting to look at share price over the long term as a proxy for business…
Read More: Fastenal’s (NASDAQ:FAST) three-year earnings growth trails the decent
