Nine Entertainment Holdings (ASX:NEC) retreats 5.1% this week but still delivers shareholders a respectable 10% CAGR over 5 years

Stock pickers are typically looking for stocks that outperform the broader market. Buying undervalued businesses is one way to earn outsized returns. That said, shares of Nine Entertainment Holdings are up 30% in five years, easily beating the market return of 15% (ignoring dividends).

With a long-term performance but a recent 5.1% pullback, let’s see if the fundamentals are in line with the stock price.

View our latest analysis for Nine Entertainment Holdings

While the efficient market hypothesis continues to be taught by some, it turns out that markets are dynamic systems that overreact and investors are not always rational. By comparing changes in earnings per share (EPS) and stock price over time, we can see how investor attitudes toward companies change over time.

In the past five years, Nine Entertainment Holdings has become profitable. This is generally considered positive, so we expect the share price to rise. Share price returns over the past three years are also worth watching given that the company was profitable three years ago rather than five. We can see that the share price of Nine Entertainment Holdings has increased by 8.5% in the past three years. During the same period, earnings per share rose 4.8% annually. This EPS growth is higher than the average annual share price growth of 2.8% over the same three years. Therefore, you might conclude that the market is more cautious about the stock these days. This lukewarm sentiment is reflected in the stock’s modest price-to-earnings ratio of 11.64.

The company’s EPS (over time) is shown in the chart below (click to see exact figures).

We know Nine Entertainment Holdings has improved its bottom line recently, but will it grow revenue?you can look at this free A report showing analyst revenue forecasts.

What about dividends?

It’s important to consider the total shareholder return as well as the share price return for any given stock. TSR is a rate of return calculation that takes into account the value of cash dividends (assuming any dividends received are reinvested) and the calculated value of any discounted financings and spin-offs. Arguably, the TSR more fully describes the return a stock generates. We note that the total shareholder return of Nine Entertainment Holdings in the past 5 years was 64%, which is better than the above share price return. It doesn’t make any sense to speculate that dividend payments largely explain the divergence!

Different perspectives

While the broader market has lost about 0.3% in 12 months, Nine Entertainment Holdings shareholders fared even worse, down 26% (even including dividends). However, this could simply be the share price being affected by broader market panic. Might be worth keeping an eye on the fundamentals in case there’s a good opportunity. On the bright side, long-term shareholders have made money, gaining 10% per year for five years. If the fundamental data continues to point to long-term sustainable growth, the current sell-off could be an opportunity worth considering. I find it very interesting to look at long-term stock prices as a proxy for business performance. But to really gain insight, we need to consider other information as well.Case in point: we found 1 warning sign for Nine Entertainment Holdings You should know.

If You Like Buying Stocks With Management, Then You Might Like This free List of companies. (Hint: insiders have been buying them).

Note that market returns quoted in this article reflect the market-weighted average return of shares currently traded on the AU exchange.

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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.