For many investors, the main point of stock picking is to generate higher returns than the overall market. But if you try your hand at stock picking, your risk returning less than the market. We regret to report that long term NZME Limited (NZSE:NZM) shareholders have had that experience, with the share price dropping 45% in three years, versus a market return of about 45%. And the ride hasn’t got any smoother in recent times over the last year, with the price 37% lower in that time. Even worse, it’s down 16% in about a month, which isn’t fun at all. Importantly, this could be a market reaction to the recently released financial results. You can check out the latest numbers in our company report.
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 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.
NZME became profitable within the last five years. We would usually expect to see the share price rise as a result. So it’s worth looking at other metrics to try to understand the share price move.
With revenue flat over three years, it seems unlikely that the share price is reflecting the top line. We’re not entirely sure why the share price is dropped, but it does seem likely investors have become less optimistic about the business.
You can see how earnings and revenue have changed over time in the image below.
It is of course excellent to see how NZME has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at NZME’s financial health with this free report on its balance sheet.
A Dividend Lost
The value of past dividends are accounted for in the total shareholder return (TSR), but not in the share price return mentioned above. Many would argue the TSR gives a more complete picture of the value a stock brings to its holders. NZME’s TSR over the last 3 years is -26%; better than its share price return. Even though the company isn’t paying dividends at the moment, it has done in the past.
A Different Perspective
Over the last year, NZME shareholders took a loss of 35%. In contrast the market gained about 14%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. Shareholders have lost 9.6% 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. Is NZME cheap compared to other companies? These 3 valuation measures might help you decide.
Of course NZME 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 NZ exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.