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We think all investors should try to buy and hold high quality multi-year winners. And highest quality companies can see their share prices grow by huge amounts. To wit, the West African Resources Limited (ASX:WAF) share price has soared 321% over five years. And this is just one example of the epic gains achieved by some long term investors. Also pleasing for shareholders was the 20% gain in the last three months.
Since the stock has added AU$182m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
View our latest analysis for West African Resources
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...' 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 five years of share price growth, West African Resources moved from a loss to profitability. Sometimes, the start of profitability is a major inflection point that can signal fast earnings growth to come, which in turn justifies very strong share price gains.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.
A Different Perspective
We're pleased to report that West African Resources shareholders have received a total shareholder return of 89% over one year. Since the one-year TSR is better than the five-year TSR (the latter coming in at 33% per year), it would seem that the stock's performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It's always interesting to track share price performance over the longer term. But to understand West African Resources better, we need to consider many other factors. To that end, you should learn about the 2 warning signs we've spotted with West African Resources (including 1 which shouldn't be ignored) .
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Australian exchanges.