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Earnings growth of 54% over 1 year hasn't been enough to translate into positive returns for StoneCo (NASDAQ:STNE) shareholders

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·3 min read
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Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. Investors in StoneCo Ltd. (NASDAQ:STNE) have tasted that bitter downside in the last year, as the share price dropped 43%. That's well below the market return of 28%. StoneCo may have better days ahead, of course; we've only looked at a one year period. In the last ninety days we've seen the share price slide 49%.

With the stock having lost 4.6% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.

See our latest analysis for StoneCo

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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 unfortunate twelve months during which the StoneCo share price fell, it actually saw its earnings per share (EPS) improve by 54%. It's quite possible that growth expectations may have been unreasonable in the past.

The divergence between the EPS and the share price is quite notable, during the year. But we might find some different metrics explain the share price movements better.

StoneCo's revenue is actually up 22% over the last year. Since the fundamental metrics don't readily explain the share price drop, there might be an opportunity if the market has overreacted.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

earnings-and-revenue-growth
earnings-and-revenue-growth

StoneCo is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling StoneCo stock, you should check out this free report showing analyst consensus estimates for future profits.

A Different Perspective

Given that the market gained 28% in the last year, StoneCo shareholders might be miffed that they lost 43%. While the aim is to do better than that, it's worth recalling that even great long-term investments sometimes underperform for a year or more. It's worth noting that the last three months did the real damage, with a 49% decline. So it seems like some holders have been dumping the stock of late - and that's not bullish. It's always interesting to track share price performance over the longer term. But to understand StoneCo better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with StoneCo (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

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.

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