In This Article:
Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, long term Meritage Homes Corporation (NYSE:MTH) shareholders have enjoyed a 100% share price rise over the last half decade, well in excess of the market return of around 66% (not including dividends).
While the stock has fallen 6.5% this week, it's worth focusing on the longer term and seeing if the stocks historical returns have been driven by the underlying fundamentals.
See our latest analysis for Meritage Homes
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 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.
Over half a decade, Meritage Homes managed to grow its earnings per share at 45% a year. This EPS growth is higher than the 15% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company. This cautious sentiment is reflected in its (fairly low) P/E ratio of 3.37.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It is of course excellent to see how Meritage Homes has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Meritage Homes' financial health with this free report on its balance sheet.
A Different Perspective
While the broader market lost about 9.3% in the twelve months, Meritage Homes shareholders did even worse, losing 24%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. On the bright side, long term shareholders have made money, with a gain of 15% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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 3 warning signs for Meritage Homes (2 can't be ignored) that you should be aware of.
Of course Meritage Homes may not be the best stock to buy. So you may wish to see this free collection of growth stocks.