Strong week for Discovery (JSE:DSY) shareholders doesn't alleviate pain of three-year loss

In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But if you try your hand at stock picking, you risk returning less than the market. Unfortunately, that's been the case for longer term Discovery Limited (JSE:DSY) shareholders, since the share price is down 21% in the last three years, falling well short of the market return of around 24%. The falls have accelerated recently, with the share price down 14% in the last three months.

While the last three years has been tough for Discovery shareholders, this past week has shown signs of promise. So let's look at the longer term fundamentals and see if they've been the driver of the negative returns.

View our latest analysis for Discovery

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 five years of share price growth, Discovery moved from a loss to profitability. We would usually expect to see the share price rise as a result. So it's worth looking at other metrics to try to understand the share price move.

With a rather small yield of just 1.1% we doubt that the stock's share price is based on its dividend. We note that, in three years, revenue has actually grown at a 3.7% annual rate, so that doesn't seem to be a reason to sell shares. It's probably worth investigating Discovery further; while we may be missing something on this analysis, there might also be an opportunity.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

earnings-and-revenue-growth

We know that Discovery has improved its bottom line over the last three years, but what does the future have in store? Take a more thorough look at Discovery's financial health with this free report on its balance sheet.

A Different Perspective

Discovery shareholders are down 12% for the year (even including dividends), but the market itself is up 12%. 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. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 2% 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's always interesting to track share price performance over the longer term. But to understand Discovery better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Discovery you should know about.

We will like Discovery better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) 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 South African 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.