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Compass Group's (LON:CPG) investors will be pleased with their 27% return over the last year

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Diversification is a key tool for dealing with stock price volatility. But if you're going to beat the market overall, you need to have individual stocks that outperform. Compass Group PLC (LON:CPG) has done well over the last year, with the stock price up 27% beating the market return of 24% (not including dividends). Unfortunately the longer term returns are not so good, with the stock falling 5.7% in the last three years.

Let's take a look at the underlying fundamentals over the longer term, and see if they've been consistent with shareholders returns.

View our latest analysis for Compass Group

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. 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.

During the last year Compass Group saw its earnings per share (EPS) drop below zero. While this may prove temporary, we'd consider it a negative, so we would not have expected to see the share price up. We might get a clue to explain the share price move by looking to other metrics.

Unfortunately Compass Group's fell 36% over twelve months. So using a snapshot of key business metrics doesn't give us a good picture of why the market is bidding up the stock.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

earnings-and-revenue-growth
earnings-and-revenue-growth

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. So it makes a lot of sense to check out what analysts think Compass Group will earn in the future (free profit forecasts).

A Different Perspective

Compass Group's TSR for the year was broadly in line with the market average, at 27%. Most would be happy with a gain, and it helps that the year's return is actually better than the average return over five years, which was 1.5%. It is possible that management foresight will bring growth well into the future, even if the share price slows down. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Compass Group , and understanding them should be part of your investment process.

Compass Group 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.

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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