Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, long term CI Resources Limited (ASX:CII) shareholders have enjoyed a 66% share price rise over the last half decade, well in excess of the market return of around 19% (not including dividends).
Check out our latest analysis for CI Resources
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
CI Resources's earnings per share are down 13% per year, despite strong share price performance over five years. This means it's unlikely the market is judging the company based on earnings growth. Because earnings per share don't seem to match up with the share price, we'll take a look at other metrics instead.
The revenue reduction of 2.0% per year is not a positive. It certainly surprises us that the share price is up, but perhaps a closer examination of the data will yield answers.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
This free interactive report on CI Resources's balance sheet strength is a great place to start, if you want to investigate the stock further.
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 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of CI Resources, it has a TSR of 111% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
CI Resources shareholders are down 5.9% for the year (even including dividends) , but the market itself is up 13%. 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. On the bright side, long term shareholders have made money, with a gain of 16% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. Before deciding if you like the current share price, check how CI Resources scores on these 3 valuation metrics.