For many, the main point of investing is to generate higher returns than the overall market. But even the best stock picker will only win with some selections. So we wouldn't blame long term Silicom Ltd. (NASDAQ:SILC) shareholders for doubting their decision to hold, with the stock down 17% over a half decade. The share price has dropped 20% in three months. This could be related to the recent financial results - you can catch up on the most recent data by reading our company report.
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.
See our latest analysis for Silicom
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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.
Looking back five years, both Silicom's share price and EPS declined; the latter at a rate of 3.1% per year. This change in EPS is reasonably close to the 4% average annual decrease in the share price. This suggests that market participants have not changed their view of the company all that much. Rather, the share price change has reflected changes in earnings per share.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We know that Silicom has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.
A Different Perspective
While the broader market gained around 11% in the last year, Silicom shareholders lost 9.8%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 3% 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. 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Silicom (of which 1 doesn't sit too well with us!) you should know about.