The five-year shareholder returns and company earnings persist lower as Herbalife (NYSE:HLF) stock falls a further 12% in past week

Long term investing is the way to go, but that doesn't mean you should hold every stock forever. We don't wish catastrophic capital loss on anyone. For example, we sympathize with anyone who was caught holding Herbalife Ltd. (NYSE:HLF) during the five years that saw its share price drop a whopping 87%. We also note that the stock has performed poorly over the last year, with the share price down 58%. More recently, the share price has dropped a further 25% in a month. We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don't have to lose the lesson.

After losing 12% this past week, it's worth investigating the company's fundamentals to see what we can infer from past performance.

See our latest analysis for Herbalife

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.

During the five years over which the share price declined, Herbalife's earnings per share (EPS) dropped by 17% each year. Readers should note that the share price has fallen faster than the EPS, at a rate of 33% per year, over the period. This implies that the market was previously too optimistic about the stock. The low P/E ratio of 7.37 further reflects this reticence.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Dive deeper into the earnings by checking this interactive graph of Herbalife's earnings, revenue and cash flow.

A Different Perspective

While the broader market gained around 26% in the last year, Herbalife shareholders lost 58%. 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 13% 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Herbalife has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of undervalued small cap 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 American 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.