One simple way to benefit from the stock market is to buy an index fund. But if you choose individual stocks with prowess, you can make superior returns. For example, the American Equity Investment Life Holding Company (NYSE:AEL) share price is up 61% in the last three years, clearly besting the market return of around 20% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 25% in the last year , including dividends .

After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.

See our latest analysis for American Equity Investment Life Holding

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just 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).

American Equity Investment Life Holding was able to grow its EPS at 77% per year over three years, sending the share price higher. This EPS growth is higher than the 17% average annual increase in the share price. So one could reasonably conclude that the market has cooled on the stock. We'd venture the lowish P/E ratio of 2.89 also reflects the negative sentiment around the stock.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

It is of course excellent to see how American Equity Investment Life Holding has grown profits over the years, but the future is more important for shareholders. You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. We note that for American Equity Investment Life Holding the TSR over the last 3 years was 66%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

We're pleased to report that American Equity Investment Life Holding shareholders have received a total shareholder return of 25% over one year. And that does include the dividend. That gain is better than the annual TSR over five years, which is 6%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Case in point: We've spotted 1 warning sign for American Equity Investment Life Holding you should be aware of.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.