The past one-year earnings decline for Ares Commercial Real Estate (NYSE: ACRE) likely explains shareholders long-term losses

It’s understandable if you feel frustrated when a stock you own sees a lower share price. But often it is not a reflection of the fundamental business performance. The Ares Commercial Real Estate Corporation (NYSE: ACRE) is down 19% over a year, but the total shareholder return is -11% once you include the dividend. That’s better than the market which declined 19% over the last year. Even if shareholders bought some time ago, they wouldn’t be particularly happy: the stock is down 16% in three years. The share price has dropped 20% in three months. However, one could argue that the price has been influenced by the general market, which is down 17% in the same timeframe.

On a more encouraging note the company has added US $ 56m to its market cap in just the last 7 days, so let’s see if we can determine what’s driven the one-year loss for shareholders.

See our latest analysis for Ares Commercial Real Estate

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. 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.

Unfortunately Ares Commercial Real Estate reported an EPS drop of 18% for the last year. This change in EPS is remarkably close to the 19% decrease in the share price. Therefore one could posit that the market has not become more concerned about the company, despite the lower EPS. Rather, the share price remains a similar multiple of the EPS, suggesting the outlook remains the same.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

NYSE: ACRE Earnings Per Share Growth June 24th 2022

We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here ..

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Ares Commercial Real Estate the TSR over the last 1 year was -11%, 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

While it’s never nice to take a loss, Ares Commercial Real Estate shareholders can take comfort that, including dividends, their trailing twelve month loss of 11% wasn’t as bad as the market loss of around 19%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 9% for each year. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. It’s always interesting to track share price performance over the longer term. But to understand Ares Commercial Real Estate better, we need to consider many other factors. Case in point: We’ve spotted 4 warning signs for Ares Commercial Real Estate you should be aware of, and 2 of them are significant.

Ares Commercial Real Estate 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.

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.

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