As Neoenergia (BVMF:NEOE3) rallies 3.4% this past week, investors may now be noticing the company's three-year earnings growth

In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Neoenergia S.A. (BVMF:NEOE3) shareholders have had that experience, with the share price dropping 16% in three years, versus a market return of about 29%.

The recent uptick of 3.4% could be a positive sign of things to come, so let's take a look at historical fundamentals.

View our latest analysis for Neoenergia

SWOT Analysis for Neoenergia

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 the unfortunate three years of share price decline, Neoenergia actually saw its earnings per share (EPS) improve by 28% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Alternatively, growth expectations may have been unreasonable in the past.

It's worth taking a look at other metrics, because the EPS growth doesn't seem to match with the falling share price.

Revenue is actually up 18% over the three years, so the share price drop doesn't seem to hinge on revenue, either. It's probably worth investigating Neoenergia further; while we may be missing something on this analysis, there might also be an opportunity.

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

Neoenergia is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So it makes a lot of sense to check out what analysts think Neoenergia will earn in the future (free analyst consensus estimates)

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Neoenergia the TSR over the last 3 years was -6.6%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Neoenergia shareholders are down 7.4% for the year (even including dividends), falling short of the market return. The market shed around 6.2%, no doubt weighing on the stock price. Shareholders have lost 2.2% 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. Although Baron Rothschild famously said to "buy when there's blood in the streets, even if the blood is your own", he also focusses on high quality stocks with solid prospects. It's always interesting to track share price performance over the longer term. But to understand Neoenergia better, we need to consider many other factors. Case in point: We've spotted 3 warning signs for Neoenergia you should be aware of, and 2 of them can't be ignored.

Of course Neoenergia may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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