One simple way to benefit from the stock market is to buy an index fund. But many of us dare to dream of bigger returns, and build a portfolio ourselves. For example, the Axos Financial, Inc. (NYSE:AX) share price is up 70% in the last three years, clearly besting the market return of around 24% (not including dividends).
Since the stock has added US$379m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
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. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During three years of share price growth, Axos Financial achieved compound earnings per share growth of 18% per year. We note that the 19% yearly (average) share price gain isn't too far from the EPS growth rate. Coincidence? Probably not. This suggests that sentiment and expectations have not changed drastically. Au contraire, the share price change has arguably mimicked the EPS growth.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
We know that Axos Financial has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.
A Different Perspective
While it's never nice to take a loss, Axos Financial shareholders can take comfort that their trailing twelve month loss of 6.4% wasn't as bad as the market loss of around 7.7%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 6% for each year. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. 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 1 warning sign for Axos Financial that you should be aware of.
We will like Axos Financial better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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