The simplest way to benefit from a rising market is to buy an index fund. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. Investors in China National Building Material Company Limited (HKG:3323) have tasted that bitter downside in the last year, as the share price dropped 40%. That's disappointing when you consider the market declined 21%. Longer term shareholders haven't suffered as badly, since the stock is down a comparatively less painful 1.4% in three years. The falls have accelerated recently, with the share price down 14% in the last three months. But this could be related to the weak market, which is down 11% in the same period.

If the past week is anything to go by, investor sentiment for China National Building Material isn't positive, so let's see if there's a mismatch between fundamentals and the share price.

View our latest analysis for China National Building Material

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.

Unfortunately China National Building Material reported an EPS drop of 9.0% for the last year. The share price decline of 40% is actually more than the EPS drop. Unsurprisingly, given the lack of EPS growth, the market seems to be more cautious about the stock. The less favorable sentiment is reflected in its current P/E ratio of 3.81.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

This free interactive report on China National Building Material's earnings, revenue and cash flow 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. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of China National Building Material, it has a TSR of -35% for the last 1 year. 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

We regret to report that China National Building Material shareholders are down 35% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 21%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Longer term investors wouldn't be so upset, since they would have made 10%, 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. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For instance, we've identified 2 warning signs for China National Building Material that you should be aware of.

Of course China National Building Material may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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. 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.