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By buying an index fund, investors can approximate the average market return. But many of us dare to dream of bigger returns, and build a portfolio ourselves. For example, Megaport Limited (ASX:MP1) shareholders have seen the share price rise 53% over three years, well in excess of the market return (8.6%, not including dividends).
The past week has proven to be lucrative for Megaport investors, so let's see if fundamentals drove the company's three-year performance.
We've discovered 1 warning sign about Megaport. View them for free.
We don't think that Megaport's modest trailing twelve month profit has the market's full attention at the moment. We think revenue is probably a better guide. As a general rule, we think this kind of company is more comparable to loss-making stocks, since the actual profit is so low. For shareholders to have confidence a company will grow profits significantly, it must grow revenue.
In the last 3 years Megaport saw its revenue grow at 27% per year. That's well above most pre-profit companies. While the compound gain of 15% per year over three years is pretty good, you might argue it doesn't fully reflect the strong revenue growth. If that's the case, now might be the time to take a close look at Megaport. A window of opportunity may reveal itself with time, if the business can trend to profitability.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Megaport is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So we recommend checking out this free report showing consensus forecasts
A Different Perspective
Megaport shareholders are down 19% for the year, but the market itself is up 11%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 4% per year over five years. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. 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. To that end, you should be aware of the 1 warning sign we've spotted with Megaport .
If you are like me, then you will not want to miss this free list of undervalued small caps that insiders are buying.