The simplest way to benefit from a rising market is to buy an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. That downside risk was realized by Li-Cycle Holdings Corp. (NYSE:LICY) shareholders over the last year, as the share price declined 40%. That contrasts poorly with the market decline of 20%. Li-Cycle Holdings may have better days ahead, of course; we’ve only looked at a one year period. Furthermore, it’s down 17% in about a quarter. That’s not much fun for holders. But this could be related to the weak market, which is down 15% in the same period.
With that in mind, it’s worth seeing if the company’s underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
Li-Cycle Holdings wasn’t profitable in the last twelve months, it is unlikely we’ll see a strong correlation between its share price and its earnings per share (EPS). Arguably revenue is our next best option. Generally speaking, companies without profits are expected to grow revenue every year, and at a good clip. That’s because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.
Li-Cycle Holdings grew its revenue by 482% over the last year. That’s a strong result which is better than most other loss making companies. Given the revenue growth, the share price drop of 40% seems quite harsh. Our sympathies to shareholders who are now underwater. On the bright side, if this company is moving profits in the right direction, top-line growth like that could be an opportunity. Our brains have evolved to think in linear fashion, so there’s value in learning to recognize exponential growth. We are, in some ways, simply the wisest of the monkeys.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
We’re pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It’s always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. You can see what analysts are predicting for Li-Cycle Holdings in this interactive graph of future profit estimates.
A Different Perspective
We doubt Li-Cycle Holdings shareholders are happy with the loss of 40% over twelve months. That falls short of the market, which lost 20%. There’s no doubt that’s a disappointment, but the stock may well have fared better in a stronger market. The share price decline has continued throughout the most recent three months, down 17%, suggesting an absence of enthusiasm from investors. Given the relatively short history of this stock, we’d remain pretty wary until we see some strong business performance. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Case in point: We’ve spotted 1 warning sign for Li-Cycle Holdings you should be aware of.
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 US 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.