Those who invested in Gulf Keystone Petroleum (LON:GKP) five years ago are up 104%
Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. To wit, the Gulf Keystone Petroleum share price has climbed 58% in five years, easily topping the market return of 6.8% (ignoring dividends).
Let's take a look at the underlying fundamentals over the longer term, and see if they've been consistent with shareholders returns.
Check out our latest analysis for Gulf Keystone Petroleum
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During the five years of share price growth, Gulf Keystone Petroleum moved from a loss to profitability. That would generally be considered a positive, so we'd expect the share price to be up. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. In fact, the Gulf Keystone Petroleum stock price is 2.9% lower in the last three years. During the same period, EPS grew by 11% each year. It would appear there's a real mismatch between the increasing EPS and the share price, which has declined -1.0% a year for three years.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. Dive deeper into the earnings by checking this interactive graph of Gulf Keystone Petroleum's earnings, revenue and cash flow.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. We note that for Gulf Keystone Petroleum the TSR over the last 5 years was 104%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It's nice to see that Gulf Keystone Petroleum shareholders have received a total shareholder return of 80% over the last year. And that does include the dividend. That gain is better than the annual TSR over five years, which is 15%. Therefore it seems like sentiment around the company has been positive lately. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. 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. Case in point: We've spotted 2 warning signs for Gulf Keystone Petroleum you should be aware of, and 1 of them is a bit unpleasant.
Gulf Keystone Petroleum 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. 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.
