While shareholders of MEG Energy (TSE:MEG) are in the black over 5 years, those who bought a week ago aren't so fortunate

For many, the main point of investing in the stock market is to achieve spectacular returns. While the best companies are hard to find, but they can generate massive returns over long periods. Don't believe it? Then look at the MEG Energy Corp. (TSE:MEG) share price. It's 428% higher than it was five years ago. And this is just one example of the epic gains achieved by some long term investors. It's down 4.3% in the last seven days.

While this past week has detracted from the company's five-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.

View our latest analysis for MEG Energy

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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During the five years of share price growth, MEG Energy moved from a loss to profitability. Sometimes, the start of profitability is a major inflection point that can signal fast earnings growth to come, which in turn justifies very strong share price gains. 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 MEG Energy share price is up 242% in the last three years. In the same period, EPS is up 125% per year. This EPS growth is higher than the 51% average annual increase in the share price over the same three years. Therefore, it seems the market has moderated its expectations for growth, somewhat.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. This free interactive report on MEG Energy's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

A Different Perspective

MEG Energy shareholders have received returns of 20% over twelve months (even including dividends), which isn't far from the general market return. We should note here that the five-year TSR is more impressive, at 39% per year. More recently, the share price growth has slowed. But it has to be said the overall picture is one of good long term and short term performance. Arguably that makes MEG Energy a stock worth watching. It's always interesting to track share price performance over the longer term. But to understand MEG Energy better, we need to consider many other factors. For instance, we've identified 1 warning sign for MEG Energy that you should be aware of.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: many of them are unnoticed AND have attractive valuation).

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