When we invest, we're generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, long term Herbalife Nutrition Ltd. (NYSE:HLF) shareholders have enjoyed a 92% share price rise over the last half decade, well in excess of the market return of around 47% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 5.0%.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 five years of share price growth, Herbalife Nutrition actually saw its EPS drop 3.8% per year. By glancing at these numbers, we'd posit that the decline in earnings per share is not representative of how the business has changed over the years. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.
The revenue reduction of 1.6% per year is not a positive. It certainly surprises us that the share price is up, but perhaps a closer examination of the data will yield answers.
The chart below shows how revenue and earnings have changed with time, (if you click on the chart you can see the actual values).
We know that Herbalife Nutrition has improved its bottom line lately, but what does the future have in store? This free report showing analyst forecasts should help you form a view on Herbalife Nutrition
A Different Perspective
Herbalife Nutrition shareholders are up 5.0% for the year. Unfortunately this falls short of the market return. If we look back over five years, the returns are even better, coming in at 14% per year for five years. It's quite possible the business continues to execute with prowess, even as the share price gains are slowing. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.
But note: Herbalife Nutrition may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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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.