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Volatility 101: Should Archer-Daniels-Midland (NYSE:ADM) Shares Have Dropped 28%?

Simply Wall St

The main aim of stock picking is to find the market-beating stocks. But even the best stock picker will only win with some selections. At this point some shareholders may be questioning their investment in Archer-Daniels-Midland Company (NYSE:ADM), since the last five years saw the share price fall 28%. The falls have accelerated recently, with the share price down 24% in the last three months. However, one could argue that the price has been influenced by the general market, which is down 24% in the same timeframe.

Check out our latest analysis for Archer-Daniels-Midland

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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.

During the five years over which the share price declined, Archer-Daniels-Midland's earnings per share (EPS) dropped by 6.6% each year. In this case, the EPS change is really very close to the share price drop of 6.3% a year. That suggests that the market sentiment around the company hasn't changed much over that time. So it's fair to say the share price has been responding to changes in EPS.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

NYSE:ADM Past and Future Earnings April 5th 2020

We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. This free interactive report on Archer-Daniels-Midland's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Archer-Daniels-Midland, it has a TSR of -16% for the last 5 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!

A Different Perspective

While the broader market lost about 14% in the twelve months, Archer-Daniels-Midland shareholders did even worse, losing 16% (even including dividends) . Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 3.4% per year over five years. 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. 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 - Archer-Daniels-Midland has 4 warning signs (and 2 which are concerning) we think you should know about.

Archer-Daniels-Midland is not the only stock that insiders are buying. 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.