For many investors, the main point of stock picking is to generate higher returns than the overall market. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. We regret to report that long term Richardson Electronics, Ltd. (NASDAQ:RELL) shareholders have had that experience, with the share price dropping 37% in three years, versus a market return of about 35%. And the ride hasn't got any smoother in recent times over the last year, with the price 27% lower in that time. There was little comfort for shareholders in the last week as the price declined a further 3.5%.
Because Richardson Electronics made a loss in the last twelve months, we think the market is probably more focussed on revenue and revenue growth, at least for now. When a company doesn't make profits, we'd generally expect to see good revenue growth. That's because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.
In the last three years, Richardson Electronics saw its revenue grow by 1.8% per year, compound. Given it's losing money in pursuit of growth, we are not really impressed with that. Indeed, the stock dropped 11% over the last three years. Shareholders will probably be hoping growth picks up soon. But ultimately the key will be whether the company can become profitability.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
This free interactive report on Richardson Electronics' balance sheet strength is a great place to start, if you want to investigate the stock further.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Richardson Electronics' TSR for the last 3 years was -29%, 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
While the broader market gained around 14% in the last year, Richardson Electronics shareholders lost 23% (even including dividends). Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 3% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For instance, we've identified 2 warning signs for Richardson Electronics that you should be aware of.
Of course Richardson Electronics 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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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