It's not a secret that every investor will make bad investments, from time to time. But it would be foolish to simply accept every extremely large loss as an inevitable part of the game. We wouldn't blame Cumulus Media Inc. (NASDAQ:CMLS) shareholders if they were still in shock after the stock dropped like a lead balloon, down 72% in just one year. A loss like this is a stark reminder that portfolio diversification is important. We wouldn't rush to judgement on Cumulus Media because we don't have a long term history to look at. Shareholders have had an even rougher run lately, with the share price down 71% in the last 90 days. However, one could argue that the price has been influenced by the general market, which is down 29% in the same timeframe.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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.
Unfortunately Cumulus Media reported an EPS drop of 90% for the last year. The share price fall of 72% isn't as bad as the reduction in earnings per share. It may have been that the weak EPS was not as bad as some had feared.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Cumulus Media has improved its bottom line over the last three years, but what does the future have in store? Take a more thorough look at Cumulus Media's financial health with this free report on its balance sheet.
A Different Perspective
We doubt Cumulus Media shareholders are happy with the loss of 72% over twelve months. That falls short of the market, which lost 17%. There's no doubt that's a disappointment, but the stock may well have fared better in a stronger market. With the stock down 71% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. 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. Even so, be aware that Cumulus Media is showing 5 warning signs in our investment analysis , and 1 of those is a bit concerning...
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.
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