By buying an index fund, you can roughly match the market return with ease. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, MGIC Investment Corporation (NYSE:MTG) shareholders have seen the share price rise 86% over three years, well in excess of the market return (36%, not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 6.9% in the last year.
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.
Over the last three years, MGIC Investment failed to grow earnings per share, which fell 17% (annualized). This means it's unlikely the market is judging the company based on earnings growth. Given this situation, it makes sense to look at other metrics too.
Do you think that shareholders are buying for the 2.8% per annum revenue growth trend? We don't. So truth be told we can't see an easy explanation for the share price action, but perhaps you can...
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
We know that MGIC Investment 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 MGIC Investment
A Different Perspective
It's good to see that MGIC Investment has rewarded shareholders with a total shareholder return of 6.9% in the last twelve months. However, that falls short of the 11% TSR per annum it has made for shareholders, each year, over five years. The pessimistic view would be that be that the stock has its best days behind it, but on the other hand the price might simply be moderating while the business itself continues to execute. Before spending more time on MGIC Investment it might be wise to click here to see if insiders have been buying or selling shares.
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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 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.