Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. That downside risk was realized by BorgWarner Inc. (NYSE:BWA) shareholders over the last year, as the share price declined 19%. That's well below the market return of 25%. Taking the longer term view, the stock fell 17% over the last three years. Shareholders have had an even rougher run lately, with the share price down 15% in the last 90 days.
With the stock having lost 5.4% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.
See our latest analysis for BorgWarner
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During the unfortunate twelve months during which the BorgWarner share price fell, it actually saw its earnings per share (EPS) improve by 65%. It could be that the share price was previously over-hyped.
It's surprising to see the share price fall so much, despite the improved EPS. So it's easy to justify a look at some other metrics.
With a low yield of 1.3% we doubt that the dividend influences the share price much. BorgWarner's revenue is actually up 32% over the last year. Since the fundamental metrics don't readily explain the share price drop, there might be an opportunity if the market has overreacted.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
BorgWarner is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for BorgWarner in this interactive graph of future profit estimates.
What About Dividends?
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. As it happens, BorgWarner's TSR for the last 1 year was -6.7%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
While the broader market gained around 25% in the last year, BorgWarner shareholders lost 6.7% (even including dividends). 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. Longer term investors wouldn't be so upset, since they would have made 1.3%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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. To that end, you should be aware of the 1 warning sign we've spotted with BorgWarner .
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American 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.