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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 in any portfolio, there are likely to be some stocks that fall short of that benchmark. We regret to report that long term Cognex Corporation (NASDAQ:CGNX) shareholders have had that experience, with the share price dropping 48% in three years, versus a market return of about 37%. More recently, the share price has dropped a further 12% in a month. We do note, however, that the broader market is down 8.5% in that period, and this may have weighed on the share price.
On a more encouraging note the company has added US$301m to its market cap in just the last 7 days, so let's see if we can determine what's driven the three-year loss for shareholders.
Check out our latest analysis for Cognex
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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, Cognex's earnings per share (EPS) dropped by 27% each year. This fall in the EPS is worse than the 20% compound annual share price fall. This suggests that the market retains some optimism around long term earnings stability, despite past EPS declines. With a P/E ratio of 53.82, it's fair to say the market sees a brighter future for the business.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. It might be well worthwhile taking a look at our free report on Cognex's earnings, revenue and cash flow.
A Different Perspective
Investors in Cognex had a tough year, with a total loss of 17% (including dividends), against a market gain of about 10%. 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 1.5% 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. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.