When we invest, we're generally looking for stocks that outperform the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, long term Nanosonics Limited (ASX:NAN) shareholders have enjoyed a 91% share price rise over the last half decade, well in excess of the market return of around 31% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 12%.
Let's take a look at the underlying fundamentals over the longer term, and see if they've been consistent with shareholders returns.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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.
During five years of share price growth, Nanosonics achieved compound earnings per share (EPS) growth of 132% per year. This EPS growth is higher than the 14% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company. Having said that, the market is still optimistic, given the P/E ratio of 228.28.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
This free interactive report on Nanosonics' earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
A Different Perspective
Nanosonics shareholders gained a total return of 12% during the year. But that was short of the market average. If we look back over five years, the returns are even better, coming in at 14% per year for five years. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. If you would like to research Nanosonics in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
Of course Nanosonics 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 AU exchanges.
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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