For many investors, the main point of stock picking is to generate higher returns than the overall market. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. Unfortunately, that's been the case for longer term AVIC Industry-Finance Holdings Co., Ltd. (SHSE:600705) shareholders, since the share price is down 34% in the last three years, falling well short of the market decline of around 21%. The falls have accelerated recently, with the share price down 12% in the last three months. However, one could argue that the price has been influenced by the general market, which is down 7.7% in the same timeframe.
With the stock having lost 3.2% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.
See our latest analysis for AVIC Industry-Finance Holdings
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During the three years that the share price fell, AVIC Industry-Finance Holdings' earnings per share (EPS) dropped by 48% each year. This fall in the EPS is worse than the 13% compound annual share price fall. So, despite the prior disappointment, shareholders must have some confidence the situation will improve, longer term. With a P/E ratio of 53.33, it's fair to say the market sees a brighter future for the business.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of AVIC Industry-Finance Holdings, it has a TSR of -28% for the last 3 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
While it's never nice to take a loss, AVIC Industry-Finance Holdings shareholders can take comfort that , including dividends,their trailing twelve month loss of 7.4% wasn't as bad as the market loss of around 13%. Unfortunately, last year's performance may indicate unresolved challenges, given that it's worse than the annualised loss of 4% over the last half decade. While some investors do well specializing in buying companies that are struggling (but nonetheless undervalued), don't forget that Buffett said that 'turnarounds seldom turn'. It's always interesting to track share price performance over the longer term. But to understand AVIC Industry-Finance Holdings better, we need to consider many other factors. Even so, be aware that AVIC Industry-Finance Holdings is showing 4 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
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Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Chinese 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.