For many, the main point of investing in the stock market is to achieve spectacular returns. While the best companies are hard to find, but they can generate massive returns over long periods. To wit, the Macquarie Telecom Group Limited (ASX:MAQ) share price has soared 313% over five years. If that doesn't get you thinking about long term investing, we don't know what will. On top of that, the share price is up 15% in about a quarter. The company reported its financial results recently; you can catch up on the latest numbers by reading our company report.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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 of share price growth, Macquarie Telecom Group moved from a loss to profitability. Sometimes, the start of profitability is a major inflection point that can signal fast earnings growth to come, which in turn justifies very strong share price gains. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. Indeed, the Macquarie Telecom Group share price has gained 95% in three years. In the same period, EPS is up 46% per year. This EPS growth is higher than the 25% average annual increase in the share price over the same three years. Therefore, it seems the market has moderated its expectations for growth, somewhat.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
It is of course excellent to see how Macquarie Telecom Group has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Macquarie Telecom Group's financial health with this free report on its balance sheet.
A Dividend Lost
It's important to keep in mind that we've been talking about the share price returns, which don't include dividends, while the total shareholder return does. Many would argue the TSR gives a more complete picture of the value a stock brings to its holders. Macquarie Telecom Group's TSR over the last 5 years is 376%; better than its share price return. Even though the company isn't paying dividends at the moment, it has done in the past.
A Different Perspective
While the broader market gained around 8.3% in the last year, Macquarie Telecom Group shareholders lost 3.4%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 37%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. Before spending more time on Macquarie Telecom Group it might be wise to click here to see if insiders have been buying or selling shares.
But note: Macquarie Telecom Group 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 AU exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.