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Thanks in no small measure to Vanguard founder Jack Bogle, it's easy buy a low cost index fund, which should provide the average market return. But if you pick the right individual stocks, you could make more than that. Notably, the Power Integrations, Inc. (NASDAQ:POWI) share price has gained 41% in three years, which is better than the average market return. The stock price is up 3.0%: that's not amazing, but it's better than a kick in the teeth.
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...' 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 three years of share price growth, Power Integrations achieved compound earnings per share growth of 21% per year. This EPS growth is higher than the 12% average annual increase in the share price. Therefore, it seems the market has moderated its expectations for growth, somewhat.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Power Integrations has improved its bottom line lately, but is it going to grow revenue? Check if analysts think Power Integrations will grow revenue in the future.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Power Integrations's TSR for the last 3 years was 45%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Power Integrations shareholders gained a total return of 3.9% during the year. But that was short of the market average. On the bright side, that's still a gain, and it's actually better than the average return of 1.9% over half a decade It is possible that returns will improve along with the business fundamentals. Before spending more time on Power Integrations it might be wise to click here to see if insiders have been buying or selling shares.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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 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.