When we invest, we're generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, the AO World plc (LON:AO.) share price is up 63% in the last 5 years, clearly besting the market return of around 1.5% (ignoring dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 38%.

So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.

View our latest analysis for AO World

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 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 half decade, AO World became profitable. That's generally thought to be a genuine positive, so investors may expect to see an increasing share price. Since the company was unprofitable five years ago, but not three years ago, it's worth taking a look at the returns in the last three years, too. We can see that the AO World share price is down 55% in the last three years. Meanwhile, EPS is up 0.4% per year. It would appear there's a real mismatch between the increasing EPS and the share price, which has declined -23% 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 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. It might be well worthwhile taking a look at our free report on AO World's earnings, revenue and cash flow.

A Different Perspective

We're pleased to report that AO World shareholders have received a total shareholder return of 38% over one year. Since the one-year TSR is better than the five-year TSR (the latter coming in at 10% per year), it would seem that the stock's performance has improved in recent times. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of undervalued small cap companies that insiders are buying.