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Imagine Owning Drax Group (LON:DRX) And Wondering If The 46% Share Price Slide Is Justified

Simply Wall St

The main aim of stock picking is to find the market-beating stocks. But in any portfolio, there will be mixed results between individual stocks. At this point some shareholders may be questioning their investment in Drax Group plc (LON:DRX), since the last five years saw the share price fall 46%. And we doubt long term believers are the only worried holders, since the stock price has declined 32% over the last twelve months. The falls have accelerated recently, with the share price down 20% in the last three months. However, one could argue that the price has been influenced by the general market, which is down 9.9% in the same timeframe.

See our latest analysis for Drax Group

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 five years over which the share price declined, Drax Group's earnings per share (EPS) dropped by 67% each year. The impact of extraordinary items helps explain this. The share price decline of 12% per year isn't as bad as the EPS decline. The relatively muted share price reaction might be because the market expects the business to turn around. With a P/E ratio of 1.66k, it's fair to say the market sees a brighter future for the business.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

LSE:DRX Past and Future Earnings May 28th 2020

It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. Dive deeper into the earnings by checking this interactive graph of Drax Group's earnings, revenue and cash flow.

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 Drax Group the TSR over the last 5 years was -36%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

While the broader market lost about 8.0% in the twelve months, Drax Group shareholders did even worse, losing 27% (even including dividends) . However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 8.5% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. 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. For example, we've discovered 5 warning signs for Drax Group (1 is significant!) that you should be aware of before investing here.

Drax Group is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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

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This article by Simply Wall St is general in nature. 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. Thank you for reading.