These days it's easy to simply buy an index fund, and your returns should (roughly) match the market. But you can do a lot better than that by buying good quality businesses for attractive prices. For example, the Tower Semiconductor Ltd. (NASDAQ:TSEM) share price is up 75% in the last five years, slightly above the market return. In comparison, the share price is down 29% in a year.
Since the stock has added US$113m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.
Over half a decade, Tower Semiconductor managed to grow its earnings per share at 28% a year. This EPS growth is higher than the 12% average annual increase in the share price. So it seems the market isn't so enthusiastic about the stock these days. The reasonably low P/E ratio of 6.88 also suggests market apprehension.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We know that Tower Semiconductor has improved its bottom line over the last three years, but what does the future have in store? This free interactive report on Tower Semiconductor's balance sheet strength is a great place to start, if you want to investigate the stock further.
A Different Perspective
Tower Semiconductor shareholders are down 29% for the year, but the market itself is up 24%. 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 12%, 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. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example - Tower Semiconductor has 2 warning signs we think you should be aware of.
We will like Tower Semiconductor better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.