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When we invest, we're generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, long term Golden Agri-Resources Ltd (SGX:E5H) shareholders have enjoyed a 53% share price rise over the last half decade, well in excess of the market return of around 5.6% (not including dividends).
Although Golden Agri-Resources has shed S$254m from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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, Golden Agri-Resources managed to grow its earnings per share at 14% a year. This EPS growth is higher than the 9% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company. The reasonably low P/E ratio of 6.25 also suggests market apprehension.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We know that Golden Agri-Resources has improved its bottom line lately, but is it going to grow revenue? If you're interested, you could check this free report showing consensus revenue forecasts .
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Golden Agri-Resources, it has a TSR of 87% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Investors in Golden Agri-Resources had a tough year, with a total loss of 11% (including dividends), against a market gain of about 8.1%. 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. Longer term investors wouldn't be so upset, since they would have made 13%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand Golden Agri-Resources better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Golden Agri-Resources (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.