Optimism around Power Integrations (NASDAQ:POWI) delivering new earnings growth may be shrinking as stock declines 8.8% this past week

In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. We regret to report that long term Power Integrations, Inc. (NASDAQ:POWI) shareholders have had that experience, with the share price dropping 41% in three years, versus a market return of about 27%. Shareholders have had an even rougher run lately, with the share price down 12% in the last 90 days. Of course, this share price action may well have been influenced by the 8.0% decline in the broader market, throughout the period.

Given the past week has been tough on shareholders, let's investigate the fundamentals and see what we can learn.

Check out our latest analysis for Power Integrations

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 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 the three years that the share price fell, Power Integrations' earnings per share (EPS) dropped by 41% each year. This fall in the EPS is worse than the 16% compound annual share price fall. This suggests that the market retains some optimism around long term earnings stability, despite past EPS declines. This positive sentiment is also reflected in the generous P/E ratio of 101.12.

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

Dive deeper into Power Integrations' key metrics by checking this interactive graph of Power Integrations's earnings, revenue and cash flow.

A Different Perspective

While the broader market gained around 11% in the last year, Power Integrations shareholders lost 17% (even including dividends). Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 7% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. It's always interesting to track share price performance over the longer term. But to understand Power Integrations better, we need to consider many other factors. For instance, we've identified 2 warning signs for Power Integrations that you should be aware of.

We will like Power Integrations better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider 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.