Many investors define successful investing as beating the market average over the long term. But in any portfolio, there are likely stocks that don’t meet that benchmark. We’re sorry to have to report this in the long run Magic Software Enterprises Ltd. (NASDAQ:MGIC) shareholders have had that experience, with the share price falling 42% in three years, versus a market return of about 27%.
With that in mind, it’s worth looking at whether the company’s underlying fundamentals have been driving its long-term performance, or if there are any discrepancies.
Check out our latest analysis for Magic Software Enterprises
Although the efficient markets hypothesis is still taught by some, it has been proven that markets are over-reactive dynamic systems and that investors are not always rational. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
Although the share price has fallen in three years, Magic Software Enterprises has managed to grow earnings by 7.4% per year over that period. This is quite a puzzle and suggests that there may be something temporarily boosting the stock price. Or else the company has been overhyped in the past, leading to disappointing growth.
Since the change in earnings per share doesn’t seem to correlate with the change in the share price, it’s worth looking at other metrics.
In fact, sales are up 4.0% over the past three years, so the share price decline doesn’t seem to depend on sales either. This analysis only scratches the surface, but it may be worth examining Magic Software Enterprises further, as shares sometimes fall unfairly. This could present an opportunity.
The company’s revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
The strength of the balance sheet is crucial. It might be worthwhile to take a look at us free report on how its financial position has changed over time.
When looking at investment returns, it is important to consider the difference between the two total shareholder return (TSR) and stock price return. The TSR is a return calculation that takes into account the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. It’s fair to say that the TSR gives a more complete picture for dividend-paying stocks. In the case of Magic Software Enterprises, it has had a TSR of -34% over the last three years. That exceeds the share price return we mentioned earlier. And there’s no prize to be won if you suspect that dividend payments explain most of the difference!
