One simple way to benefit from the stock market is to buy an index fund. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, Rakon Limited (NZSE:RAK) shareholders have seen the share price rise 82% over three years, well in excess of the market return (23%, not including dividends). On the other hand, the returns haven’t been quite so good recently, with shareholders up just 48%.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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 three years of share price growth, Rakon moved from a loss to profitability. That would generally be considered a positive, so we’d expect the share price to be up.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It might be well worthwhile taking a look at our free report on Rakon’s earnings, revenue and cash flow.
A Different Perspective
It’s nice to see that Rakon shareholders have received a total shareholder return of 48% over the last year. That gain is better than the annual TSR over five years, which is 9.0%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. It’s always interesting to track share price performance over the longer term. But to understand Rakon better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We’ve identified 2 warning signs with Rakon , and understanding them should be part of your investment process.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on NZ 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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