Ideally, your overall portfolio should beat the market average. But every investor is virtually certain to have both over-performing and under-performing stocks. So we wouldn't blame long term Jazz Pharmaceuticals plc (NASDAQ:JAZZ) shareholders for doubting their decision to hold, with the stock down 43% over a half decade. Furthermore, it's down 29% in about a quarter. That's not much fun for holders. However, one could argue that the price has been influenced by the general market, which is down 17% in the same timeframe.
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. 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.
While the share price declined over five years, Jazz Pharmaceuticals actually managed to increase EPS by an average of 57% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.
Due to the lack of correlation between the EPS growth and the falling share price, it's worth taking a look at other metrics to try to understand the share price movement.
In contrast to the share price, revenue has actually increased by 12% a year in the five year period. So it seems one might have to take closer look at the fundamentals to understand why the share price languishes. After all, there may be an opportunity.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Jazz Pharmaceuticals is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. You can see what analysts are predicting for Jazz Pharmaceuticals in this interactive graph of future profit estimates.
A Different Perspective
While the broader market lost about 3.3% in the twelve months, Jazz Pharmaceuticals shareholders did even worse, losing 16%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 11% per year over five years. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For instance, we've identified 3 warning signs for Jazz Pharmaceuticals that you should be aware of.
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Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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.
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