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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 Berkshire Hathaway Inc. (NYSE:BRK.A) shareholders have enjoyed a 93% share price rise over the last half decade, well in excess of the market return of around 70% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 21%.
Now it's worth having a look at the company's fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.
Check out our latest analysis for Berkshire Hathaway
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During five years of share price growth, Berkshire Hathaway achieved compound earnings per share (EPS) growth of 35% per year. This EPS growth is higher than the 14% average annual increase in the share price. So it seems the market isn't so enthusiastic about the stock these days. This cautious sentiment is reflected in its (fairly low) P/E ratio of 8.97.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. It might be well worthwhile taking a look at our free report on Berkshire Hathaway's earnings, revenue and cash flow.
A Different Perspective
Berkshire Hathaway provided a TSR of 21% over the last twelve months. But that was short of the market average. The silver lining is that the gain was actually better than the average annual return of 14% per year over five year. It is possible that returns will improve along with the business 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. Case in point: We've spotted 1 warning sign for Berkshire Hathaway you should be aware of.
Of course Berkshire Hathaway may not be the best stock to buy. So you may wish to see this free collection of growth stocks.