Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. To wit, the CGN New Energy Holdings share price has climbed 64% in five years, easily topping the market decline of 25% (ignoring dividends).
The past week has proven to be lucrative for CGN New Energy Holdings investors, so let's see if fundamentals drove the company's five-year performance.
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.
Over half a decade, CGN New Energy Holdings managed to grow its earnings per share at 17% a year. This EPS growth is higher than the 10% average annual increase in the share price. So it seems the market isn't so enthusiastic about the stock these days. This cautious sentiment is reflected in its (fairly low) P/E ratio of 4.97.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
It might be well worthwhile taking a look at our free report on CGN New Energy Holdings' earnings, revenue and cash flow.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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 CGN New Energy Holdings, it has a TSR of 89% 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
We regret to report that CGN New Energy Holdings shareholders are down 28% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 7.5%. 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 14%, 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 CGN New Energy Holdings better, we need to consider many other factors. To that end, you should learn about the 2 warning signs we've spotted with CGN New Energy Holdings (including 1 which doesn't sit too well with us) .
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Hong Kong 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.