In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term China Cinda Asset Management Co., Ltd. (HKG:1359) shareholders have had that experience, with the share price dropping 45% in three years, versus a market decline of about 4.8%. The silver lining is that the stock is up 1.9% in about a week.
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 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.
During the three years that the share price fell, China Cinda Asset Management's earnings per share (EPS) dropped by 20% each year. This fall in EPS isn't far from the rate of share price decline, which was 18% per year. That suggests that the market sentiment around the company hasn't changed much over that time, despite the disappointment. It seems like the share price is reflecting the declining earnings per share.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. It might be well worthwhile taking a look at our free report on China Cinda Asset Management's earnings, revenue and cash flow.
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, China Cinda Asset Management's TSR for the last 3 years was -33%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
China Cinda Asset Management shareholders are down 5.5% for the year (even including dividends), but the market itself is up 26%. 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. It's always interesting to track share price performance over the longer term. But to understand China Cinda Asset Management better, we need to consider many other factors. For instance, we've identified 3 warning signs for China Cinda Asset Management (1 can't be ignored) that you should be aware of.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK exchanges.
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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. 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.
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