For many investors, the main point of stock picking is to generate higher returns than the overall market.  But the risk of stock picking is that you will likely buy under-performing companies.  Unfortunately, that's been the case for longer term Kennametal Inc. (NYSE:KMT) shareholders, since the share price is down 36% in the last three years, falling well short of the market return of around 18%.    

While the last three years has been tough for Kennametal shareholders, this past week has shown signs of promise. So let's look at the longer term fundamentals and see if they've been the driver of the negative returns.  

Check out our latest analysis for Kennametal

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 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.

During five years of share price growth, Kennametal moved from a loss to profitability.    We would usually expect to see the share price rise as a result.  So it's worth looking at other metrics to try to understand the share price move.  

We note that, in three years, revenue has actually grown at a 6.8% annual rate, so that doesn't seem to be a reason to sell shares.  This analysis is just perfunctory, but it might be worth researching Kennametal more closely, as sometimes stocks fall unfairly. This could present an opportunity.    

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

NYSE:KMT Earnings and Revenue Growth December 3rd 2023

We know that Kennametal has improved its bottom line over the last three years, but what does the future have in store?  This free interactive report on Kennametal's balance sheet strength is a great place to start, if you want to investigate the stock further.  

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.  It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend.  We note that for Kennametal the TSR over the last 3 years was -30%, which is better than the share price return mentioned above.  The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

While the broader market gained around 14% in the last year, Kennametal shareholders lost 6.1% (even including dividends).  However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period.     Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 5% 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.   To that end, you should be aware of the   2 warning signs we've spotted with Kennametal .  

But note: Kennametal may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American 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.