Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. Investors in Cosmos Machinery Enterprises Limited (HKG:118) have tasted that bitter downside in the last year, as the share price dropped 40%. That’s well bellow the market return of -13%. Longer term shareholders haven’t suffered as badly, since the stock is down a comparatively less painful 4.2% in three years. There was little comfort for shareholders in the last week as the price declined a further 9.0%.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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 unfortunate twelve months during which the Cosmos Machinery Enterprises share price fell, it actually saw its earnings per share (EPS) improve by 146%. It’s quite possible that growth expectations may have been unreasonable in the past. It’s surprising to see the share price fall so much, despite the improved EPS. So it’s easy to justify a look at some other metrics.
Cosmos Machinery Enterprises’s dividend seems healthy to us, so we doubt that the yield is a concern for the market. The revenue trend doesn’t seem to explain why the share price is down. Unless, of course, the market was expecting a revenue uptick.
The chart below shows how revenue and earnings have changed with time, (if you click on the chart you can see the actual values).
If you are thinking of buying or selling Cosmos Machinery Enterprises stock, you should check out this FREE detailed report on its balance sheet.
What about the Total Shareholder Return (TSR)?
We’d be remiss not to mention the difference between Cosmos Machinery Enterprises’s total shareholder return (TSR) and its share price return. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Its history of dividend payouts mean that Cosmos Machinery Enterprises’s TSR, which was a 40% drop over the last year, was not as bad as the share price return.
A Different Perspective
We regret to report that Cosmos Machinery Enterprises shareholders are down 40% for the year (even including dividends). Unfortunately, that’s worse than the broader market decline of 13%. Having said that, it’s inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Unfortunately, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 2.4% over the last half decade. We realise that Buffett 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 businesses. Importantly, we haven’t analysed Cosmos Machinery Enterprises’s dividend history. This free visual report on its dividends is a must-read if you’re thinking of buying.
Of course Cosmos Machinery Enterprises 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.