For many investors, the main point of stock picking is to generate higher returns than the overall market. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. We regret to report that long term Grifols, S.A. (BME:GRF) shareholders have had that experience, with the share price dropping 35% in three years, versus a market return of about 11%. And over the last year the share price fell 34%, so we doubt many shareholders are delighted. Shareholders have had an even rougher run lately, with the share price down 27% in the last 90 days.
Since Grifols has shed €976m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.
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 three years that the share price fell, Grifols' earnings per share (EPS) dropped by 1.7% each year. This reduction in EPS is slower than the 13% annual reduction in the share price. So it seems the market was too confident about the business, in the past.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. It might be well worthwhile taking a look at our free report on Grifols' earnings, revenue and cash flow.
A Different Perspective
Investors in Grifols had a tough year, with a total loss of 33% (including dividends), against a market gain of about 5.1%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 1.4% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. It's always interesting to track share price performance over the longer term. But to understand Grifols better, we need to consider many other factors. To that end, you should learn about the 3 warning signs we've spotted with Grifols (including 1 which is a bit unpleasant) .
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 ES 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.