It’s easy to match the overall market return by buying an index fund. Active investors aim to buy stocks that significantly outperform the market – but in the process, they risk underperforming. This downside risk was materialized by Elanco Animal Health Incorporated (NYSE: MOMENTUM) shareholders over the past year, with the share price dropping 35%. This is significantly lower than the market decline of around 8.9%. To make matters worse, the three-year returns were also very disappointing (the share price is 32% lower than three years ago).
While the past year has been difficult for Elanco Animal Health shareholders, the past week has shown promising signs. So let’s take a look at the longer term fundamentals and see if they were the driver of the negative returns.
Although the efficient markets hypothesis continues to be taught by some, it has been proven that markets are overly reactive dynamic systems and that investors are not always rational. An imperfect but simple way to examine how a company’s market perception has changed is to compare the evolution of earnings per share (EPS) with the movement of the share price.
In the unfortunate twelve months that Elanco Animal Health’s stock price fell, it actually saw its earnings per share (EPS) improve by 76%. Of course, the situation could betray the previous excess of optimism regarding growth. In fact, we can see that extraordinary items have impacted earnings over the past twelve months.
It’s fair to say that the stock price doesn’t seem to reflect EPS growth. But we might find different measures that better explain stock price movements.
Revenues were pretty flat compared to last year, which isn’t too bad. However, it is certainly possible that the market was expecting higher earnings and that the falling share price reflects this disappointment.
The graph below illustrates the evolution of income and income over time (reveal the exact values by clicking on the image).
It’s probably worth noting that we saw significant insider buying in the last quarter, which we view as a positive. On the other hand, we believe revenue and earnings trends are much more meaningful measures of the business. You can see what analysts are predicting for Elanco Animal Health in this interactive graph of future earnings estimates.
A different perspective
The last twelve months have not been great for shares of Elanco Animal Health, which underperformed the market, costing holders 35%. Meanwhile, the broader market slipped around 8.9%, likely weighing on the stock. The loss of 10% per year over three years is not as bad as the last twelve months, which suggests that the company has not been able to convince the market that it has solved its problems. We would be hesitant to invest in a company with unresolved issues, although some investors will buy troubled stocks if they think the price is attractive enough. If you want to research this stock further, the insider buying data is an obvious place to start. You can click here to see who bought shares – and the price they paid.
There are many other companies whose insiders buy shares. You probably do not want to miss this free list of growing companies insiders are buying.
Please note that the market returns quoted in this article reflect the average market-weighted returns of stocks currently trading on US exchanges.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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