Buying shares in the best businesses can build meaningful wealth for you and your family. And highest quality companies can see their share prices grow by huge amounts. Don't believe it? Then look at the Tenet Healthcare Corporation (NYSE:THC) share price. It's 691% higher than it was five years ago. And this is just one example of the epic gains achieved by some long term investors. It's also good to see the share price up 22% over the last quarter. We love happy stories like this one. The company should be really proud of that performance!
So let's assess the underlying fundamentals over the last 5 years and see if they've moved in lock-step with shareholder returns.
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. 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.
During the last half decade, Tenet Healthcare became profitable. Sometimes, the start of profitability is a major inflection point that can signal fast earnings growth to come, which in turn justifies very strong share price gains. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. We can see that the Tenet Healthcare share price is up 117% in the last three years. In the same period, EPS is up 91% per year. This EPS growth is higher than the 30% average annual increase in the share price over the same three years. Therefore, it seems the market has moderated its expectations for growth, somewhat. This cautious sentiment is reflected in its (fairly low) P/E ratio of 5.66.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
We know that Tenet Healthcare has improved its bottom line over the last three years, but what does the future have in store? This free interactive report on Tenet Healthcare's balance sheet strength is a great place to start, if you want to investigate the stock further.
A Different Perspective
It's nice to see that Tenet Healthcare shareholders have received a total shareholder return of 108% over the last year. That's better than the annualised return of 51% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Tenet Healthcare (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.
If you are like me, then you will not want to miss this free list of undervalued small caps that insiders are 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.
