Investors in the Australian Unity Office Fund (ASX:AOF) have sadly lost 32% over the past three years

In order to justify the effort of picking individual stocks, it is worth striving to beat the returns of an index fund. But the risk of stock picking is that you are likely to buy underperforming companies. Unfortunately, this has been the case for longer Australian Unity Office Fund (ASX:AOF) shareholders, as the stock price has fallen 44% over the past three years, well below the market return of around 25%. And newer buyers are also having a hard time, with a 34% drop last year. Unfortunately, the stock price momentum is still quite negative, with prices down 24% in thirty days.

Now let’s look at the fundamentals of the business and see if the long-term shareholder return matches the performance of the underlying business.

See our latest analysis for Australian Unity Office Fund

It is undeniable that markets are sometimes efficient, but prices do not always reflect the underlying performance of companies. One way to look at how market sentiment has changed over time is to look at the interaction between a company’s stock price and its earnings per share (EPS).

Australian Unity Office Fund has seen its EPS decline at a compound rate of 52% per annum, over the past three years. In comparison, the 18% annual compound decline in the share price is not as severe as the drop in EPS. So, despite the earlier disappointment, shareholders should be certain that the situation will improve in the longer term.

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

earnings per share growth

We consider it positive that insiders have made significant purchases over the past year. That said, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a careful review of historical growth trends, available here.

What about dividends?

It is important to consider the total shareholder return, as well as the stock price return, for a given stock. TSR is a calculation of return that takes into account the value of cash dividends (assuming any dividends received have been reinvested) and the calculated value of all discounted capital raisings and spinoffs. It’s fair to say that the TSR gives a more complete picture of stocks that pay a dividend. We note that for Australian Unity Office Fund the TSR over the past 3 years was -32%, which is better than the stock price return mentioned above. The dividends paid by the company thus inflated the total return to shareholders.

A different perspective

While the broader market gained about 0.6% last year, Australian Unity Office Fund shareholders lost 29% (including dividends). Even good stock prices sometimes drop, but we want to see improvements in a company’s fundamentals before we get too interested. On the positive side, long-term shareholders have made money, with a gain of 0.3% per year over half a decade. It could be that the recent selloff is an opportunity, so it may be worth checking the fundamentals for signs of a long-term growth trend. It is always interesting to follow the evolution of the share price over the long term. But to better understand the Australian Unity Office Fund, we need to consider many other factors. Take for example the ubiquitous specter of investment risk. We have identified 2 warning signs with Australian Unity Office Fund, and understanding them should be part of your investment process.

Australian Unity Office Fund isn’t the only stock insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider buying, might be just the ticket.

Please note that the market returns quoted in this article reflect the market-weighted average returns of stocks currently trading on AU exchanges.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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Jose C. Birney