Stock pickers are generally looking for stocks that will outperform the broader market. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Shougang Fushan Resources Group Limited (HKG:639) share price is up 51% in the last 5 years, clearly besting the market return of around 5.3% (ignoring dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 41% in the last year , including dividends .
Since the stock has added HK$909m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 last half decade, Shougang Fushan Resources Group became profitable. That would generally be considered a positive, so we'd expect the share price to be up. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. We can see that the Shougang Fushan Resources Group share price is up 38% in the last three years. During the same period, EPS grew by 6.2% each year. Notably, the EPS growth has been slower than the annualised share price gain of 11% over three years. So it's fair to assume the market has a higher opinion of the business than it did three years ago.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Shougang Fushan Resources Group's TSR for the last 5 years was 131%, 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
We're pleased to report that Shougang Fushan Resources Group shareholders have received a total shareholder return of 41% over one year. Of course, that includes the dividend. That's better than the annualised return of 18% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. It's always interesting to track share price performance over the longer term. But to understand Shougang Fushan Resources Group better, we need to consider many other factors. Take risks, for example - Shougang Fushan Resources Group has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
Shougang Fushan Resources Group is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK 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.