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While not a mind-blowing move, it is good to see that the Changshouhua Food Company Limited (HKG:1006) share price has gained 22% in the last three months. But that doesn't change the fact that the returns over the last five years have been less than pleasing. In fact, the share price is down 43%, which falls well short of the return you could get by buying an index fund.
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 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).
While the share price declined over five years, Changshouhua Food actually managed to increase EPS by an average of 6.4% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Or possibly, the market was previously very optimistic, so the stock has disappointed, despite improving EPS.
Because of the sharp contrast between the EPS growth rate and the share price growth, we're inclined to look to other metrics to understand the changing market sentiment around the stock.
Revenue is actually up 5.5% over the time period. So it seems one might have to take closer look at the fundamentals to understand why the share price languishes. After all, there may be an opportunity.
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