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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. That downside risk was realized by Cipla Limited (NSE:CIPLA) shareholders over the last year, as the share price declined 33%. That's well bellow the market return of 0.3%. At least the damage isn't so bad if you look at the last three years, since the stock is down 24% in that time. Furthermore, it's down 21% in about a quarter. That's not much fun for holders.
View our latest analysis for Cipla
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.
Even though the Cipla share price is down over the year, its EPS actually improved. It's quite possible that growth expectations may have been unreasonable in the past.
It's fair to say that the share price does not seem to be reflecting the EPS growth. So it's easy to justify a look at some other metrics.
With a low yield of 0.7% we doubt that the dividend influences the share price much. Cipla's revenue is actually up 5.6% over the last year. Since the fundamental metrics don't readily explain the share price drop, there might be an opportunity if the market has overreacted.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
Cipla is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. So we recommend checking out this free report showing consensus forecasts
A Different Perspective
Cipla shareholders are down 33% for the year (even including dividends) , but the market itself is up 0.3%. 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. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 6.4% 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. If you would like to research Cipla in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.