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In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. Unfortunately, that's been the case for longer term Teradyne, Inc. (NASDAQ:TER) shareholders, since the share price is down 33% in the last three years, falling well short of the market return of around 21%. And over the last year the share price fell 29%, so we doubt many shareholders are delighted. The share price has dropped 43% in three months.
Since Teradyne has shed US$1.7b from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 the three years that the share price fell, Teradyne's earnings per share (EPS) dropped by 18% each year. This fall in the EPS is worse than the 12% compound annual share price fall. So, despite the prior disappointment, shareholders must have some confidence the situation will improve, longer term.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We know that Teradyne 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 4.8% in the last year, Teradyne shareholders lost 29% (even including dividends). 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. Longer term investors wouldn't be so upset, since they would have made 5%, each year, over five years. 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. Before spending more time on Teradyne it might be wise to click here to see if insiders have been buying or selling shares.
But note: Teradyne may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).