Headwater Exploration (TSE:HWX) increases 5.5% this week, taking five-year gains to 569%

We think all investors should try to buy and hold high quality multi-year winners. And we've seen some truly amazing gains over the years. For example, the Headwater Exploration Inc. (TSE:HWX) share price is up a whopping 474% in the last half decade, a handsome return for long term holders. And this is just one example of the epic gains achieved by some long term investors. On top of that, the share price is up 13% in about a quarter. But this could be related to the strong market, which is up 9.6% in the last three months.

Since it's been a strong week for Headwater Exploration shareholders, let's have a look at trend of the longer term fundamentals.

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To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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 five years of share price growth, Headwater Exploration moved from a loss to profitability. 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. In fact, the Headwater Exploration stock price is 8.8% lower in the last three years. Meanwhile, EPS is up 20% per year. It would appear there's a real mismatch between the increasing EPS and the share price, which has declined -3.0% a year for three years.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Headwater Exploration the TSR over the last 5 years was 569%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

Headwater Exploration shareholders are down 2.7% for the year (even including dividends), but the market itself is up 19%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 46% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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. Take risks, for example - Headwater Exploration has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Canadian 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.