By buying an index fund, investors can approximate the average market return. But if you choose individual stocks with prowess, you can make superior returns. For example, SemiLEDs Corporation (NASDAQ:LEDS) shareholders have seen the share price rise 97% over three years, well in excess of the market return (39%, not including dividends).
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SemiLEDs isn't a profitable company, so it is unlikely we'll see a strong correlation between its share price and its earnings per share (EPS). Arguably revenue is our next best option. When a company doesn't make profits, we'd generally expect to see good revenue growth. Some companies are willing to postpone profitability to grow revenue faster, but in that case one does expect good top-line growth.
In the last 3 years SemiLEDs saw its revenue shrink by 19% per year. The revenue growth might be lacking but the share price has gained 25% each year in that time. If the company is cutting costs profitability could be on the horizon, but the revenue decline is a prima facie concern.
You can see how revenue and earnings have changed over time in the image below, (click on the chart to see cashflow).
This free interactive report on SemiLEDs's balance sheet strength is a great place to start, if you want to investigate the stock further.
A Different Perspective
SemiLEDs shareholders are down 37% for the year, but the market itself is up 4.8%. 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. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 20% over the last half decade. We realise that Buffett 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 businesses. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.
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 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.