Generally speaking long term investing is the way to go. But that doesn't mean long term investors can avoid big losses. For example the The L.S. Starrett Company (NYSE:SCX) share price dropped 60% over five years. That is extremely sub-optimal, to say the least. The falls have accelerated recently, with the share price down 14% in the last three months.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
L.S. Starrett became profitable within the last five years. Most would consider that to be a good thing, so it's counter-intuitive to see the share price declining. Other metrics may better explain the share price move.
It could be that the revenue decline of 3.5% per year is viewed as evidence that L.S. Starrett is shrinking. That could explain the weak share price.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Balance sheet strength is crucial. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.
A Dividend Lost
The share price return figures discussed above don't include the value of dividends paid previously, but the total shareholder return (TSR) does. Many would argue the TSR gives a more complete picture of the value a stock brings to its holders. L.S. Starrett's TSR over the last 5 years is -54%; better than its share price return. Although the company had to cut dividends, it has paid cash to shareholders in the past.
A Different Perspective
L.S. Starrett shareholders are down 9.8% for the year, but the market itself is up 6.2%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. However, the loss over the last year isn't as bad as the 15% per annum loss investors have suffered over the last half decade. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.
Of course L.S. Starrett may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
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.