Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. Unfortunately the Ares Commercial Real Estate Corporation (NYSE:ACRE) share price slid 46% over twelve months. That falls noticeably short of the market decline of around 3.6%. Longer term shareholders haven’t suffered as badly, since the stock is down a comparatively less painful 1.4% in three years. Shareholders have had an even rougher run lately, with the share price down 31% in the last 90 days.
It’s worthwhile assessing if the company’s economics have been moving in lockstep with these underwhelming shareholder returns, or if there is some disparity between the two. So let’s do just that.
View our latest analysis for Ares Commercial Real Estate
SWOT Analysis for Ares Commercial Real Estate
- Dividend is in the top 25% of dividend payers in the market.
- Earnings declined over the past year.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the American market.
- Good value based on P/E ratio and estimated fair value.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by earnings and cashflows.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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.
Unfortunately Ares Commercial Real Estate reported an EPS drop of 60% for the last year. The share price fall of 46% isn’t as bad as the reduction in earnings per share. So the market may not be too worried about the EPS figure, at the moment — or it may have expected earnings to drop faster.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We’re pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Dive deeper into the earnings by checking this interactive graph of Ares Commercial Real Estate’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 Ares Commercial Real Estate the TSR over the last 1 year was -39%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
We regret to report that Ares Commercial Real Estate shareholders are down 39% for the year (even including dividends). Unfortunately, that’s worse than the broader market decline of 3.6%. 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. Longer term investors wouldn’t be so upset, since they would have made 1.6%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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 instance, we’ve identified 3 warning signs for Ares Commercial Real Estate (2 are a bit concerning) that you should be aware of.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.
Valuation is complex, but we’re helping make it simple.
Find out whether Ares Commercial Real Estate is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
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