If you are building a properly diversified stock portfolio, the chances are some of your picks will perform badly. But the long term shareholders of Midway Limited (ASX:MWY) have had an unfortunate run in the last three years. So they might be feeling emotional about the 66% share price collapse, in that time. And the ride hasn't got any smoother in recent times over the last year, with the price 49% lower in that time. The falls have accelerated recently, with the share price down 21% in the last three months.
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 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.
Over the three years that the share price declined, Midway's earnings per share (EPS) dropped significantly, falling to a loss. Due to the loss, it's not easy to use EPS as a reliable guide to the business. But it's safe to say we'd generally expect the share price to be lower as a result!
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
Dive deeper into Midway's key metrics by checking this interactive graph of Midway's earnings, revenue and cash flow.
What about the Total Shareholder Return (TSR)?
Investors should note that there's a difference between Midway's total shareholder return (TSR) and its share price change, which we've covered above. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. Dividends have been really beneficial for Midway shareholders, and that cash payout explains why its total shareholder loss of 61%, over the last 3 years, isn't as bad as the share price return.
A Different Perspective
The last twelve months weren't great for Midway shares, which cost holders 49%, while the market was up about 4.5%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Shareholders have lost 17% per year over the last three years, so the share price drop has become steeper, over the last year; a potential symptom of as yet unsolved challenges. We would be wary of buying into a company with unsolved problems, although some investors will buy into struggling stocks if they believe the price is sufficiently attractive. 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. For example, we've discovered 2 warning signs for Midway that you should be aware of before investing here.
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 AU exchanges.
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This article by Simply Wall St is general in nature. 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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