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It's easy to match the overall market return by buying an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. That downside risk was realized by Saturn Oil & Gas Inc. (TSE:SOIL) shareholders over the last year, as the share price declined 39%. That falls noticeably short of the market return of around 14%. We note that it has not been easy for shareholders over three years, either; the share price is down 38% in that time. The falls have accelerated recently, with the share price down 24% in the last three months.
With that in mind, it's worth seeing if the company's underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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.
Saturn Oil & Gas managed to increase earnings per share from a loss to a profit, over the last 12 months.
The result looks like a strong improvement to us, so we're surprised the market has sold down the shares. If the company can sustain the earnings growth, this might be an inflection point for the business, which would make right now a really interesting time to study it more closely.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It's good to see that there was some significant insider buying in the last three months. That's a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. This free interactive report on Saturn Oil & Gas' earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
A Different Perspective
While the broader market gained around 14% in the last year, Saturn Oil & Gas shareholders lost 39%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 6% over the last half decade. 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Saturn Oil & Gas (at least 1 which is concerning) , and understanding them should be part of your investment process.