As every investor would know, not every swing hits the sweet spot. But really big losses can really drag down an overall portfolio. So take a moment to sympathize with the long term shareholders of Medifast, Inc. (NYSE:MED), who have seen the share price tank a massive 85% over a three year period. That would be a disturbing experience. And the ride hasn't got any smoother in recent times over the last year, with the price 66% lower in that time. Furthermore, it's down 49% in about a quarter. That's not much fun for holders. We really feel for shareholders in this scenario. It's a good reminder of the importance of diversification, and it's worth keeping in mind there's more to life than money, anyway.

If the past week is anything to go by, investor sentiment for Medifast isn't positive, so let's see if there's a mismatch between fundamentals and the share price.

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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).

During the unfortunate three years of share price decline, Medifast actually saw its earnings per share (EPS) improve by 1.8% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Or else the company was over-hyped in the past, and so its growth has disappointed.

It's pretty reasonable to suspect the market was previously to bullish on the stock, and has since moderated expectations. However, taking a look at other business metrics might shed a bit more light on the share price action.

We note that, in three years, revenue has actually grown at a 3.8% annual rate, so that doesn't seem to be a reason to sell shares. This analysis is just perfunctory, but it might be worth researching Medifast more closely, as sometimes stocks fall unfairly. This could present an opportunity.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

A Different Perspective

While the broader market gained around 28% in the last year, Medifast shareholders lost 64%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 11% 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 Medifast better, we need to consider many other factors. For example, we've discovered 2 warning signs for Medifast (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

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.