It's easy to match the overall market return by buying an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. Investors in Titan Machinery Inc. (NASDAQ:TITN) have tasted that bitter downside in the last year, as the share price dropped 50%. That falls noticeably short of the market return of around 19%. Even if you look out three years, the returns are still disappointing, with the share price down44% in that time. The falls have accelerated recently, with the share price down 31% in the last three months.

If the past week is anything to go by, investor sentiment for Titan Machinery 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 flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

Unfortunately Titan Machinery reported an EPS drop of 15% for the last year. The share price decline of 50% is actually more than the EPS drop. This suggests the EPS fall has made some shareholders more nervous about the business. The less favorable sentiment is reflected in its current P/E ratio of 3.85.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. That said, we think earnings and revenue growth trends are even more important factors to consider.

A Different Perspective

Titan Machinery shareholders are down 50% for the year, but the market itself is up 19%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 3% 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. 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 - Titan Machinery has 2 warning signs we think you should be aware of.

Titan Machinery is not the only stock insiders are buying. So take a peek at this free list of small cap companies at attractive valuations which insiders have been buying.

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

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.