Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, long term Xinyi Solar Holdings Limited (HKG:968) shareholders have enjoyed a 96% share price rise over the last half decade, well in excess of the market return of around -12% (not including dividends).
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.
Over half a decade, Xinyi Solar Holdings managed to grow its earnings per share at 21% a year. This EPS growth is higher than the 14% average annual increase in the share price. So it seems the market isn’t so enthusiastic about the stock these days.
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Xinyi Solar Holdings’s TSR for the last 5 years was 141%, which exceeds the share price return mentioned earlier. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It’s nice to see that Xinyi Solar Holdings shareholders have received a total shareholder return of 95% over the last year. That’s including the dividend. That’s better than the annualised return of 19% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. Before deciding if you like the current share price, check how Xinyi Solar Holdings scores on these 3 valuation metrics.
Of course Xinyi Solar Holdings may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.