If you want to grow your wealth in the stock market, you can buy an index fund. But you can do much better by buying quality companies at attractive prices. For example, Berkshire Hathaway (NYSE:BRK.A) shares are up 90% over the past five years, slightly outperforming the market return, and by extension, the stock is up 18% over the past year, doing pretty well.
With that in mind, it’s worth looking into whether a company’s underlying fundamentals are driving its long-term performance, or if there are any inconsistencies.
Check out our latest analysis for Berkshire Hathaway
While the efficient market hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems and investors are not always rational. One way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).
Over five years, Berkshire Hathaway has grown its earnings per share at 26% per year. This EPS growth rate has outpaced the 14% average annual increase in its share price. As such, the market seems relatively pessimistic about the company. This cautious view is reflected in the company’s (fairly low) P/E ratio of 11.98.
You can see below how EPS has changed over time (discover the exact values ​​by clicking on the image).
It’s worth noting that the CEO’s pay is lower than the average for companies of a similar size. While CEO pay is always worth keeping an eye on, the more important question is whether the company will be able to grow earnings over the next few years. Check out this interactive graph of Berkshire Hathaway’s earnings, revenue and cash flow to delve deeper into the earnings.
A different perspective
Berkshire Hathaway shareholders have earned a total return of 18% for the year. Unfortunately, this falls short of the market return. On the bright side, it’s still a gain, and in fact, it’s better than the five-year average return of 14%. It’s likely that returns will improve along with the fundamentals of the business. While it’s well worth considering the different effects that market conditions can have on stock prices, there are other factors that are even more important. For example, risk taking – Berkshire Hathaway is 1. Warning Signs I think you should know.
For those who love to find A winning investment this free This list of undervalued companies with recent insider buying could be just the thing.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide 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 position in any of the stocks mentioned.
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