We think intelligent long term investing is the way to go. But no-one is immune from buying too high. To wit, the Midea Real Estate Holding Limited (HKG:3990) share price managed to fall 78% over five long years. That's not a lot of fun for true believers. And we doubt long term believers are the only worried holders, since the stock price has declined 37% over the last twelve months. And the share price decline continued over the last week, dropping some 6.5%. But this could be related to the soft market, which is down about 3.1% in the same period.
Since Midea Real Estate Holding has shed HK$431m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.
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To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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 five years of share price growth, Midea Real Estate Holding moved from a loss to profitability. That would generally be considered a positive, so we are surprised to see the share price is down. Other metrics may better explain the share price move.
The most recent dividend was actually lower than it was in the past, so that may have sent the share price lower. The revenue decline of around 1.5% would not have helped the stock price. So it seems weak revenue and dividend trends may have influenced the share price.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. So it makes a lot of sense to check out what analysts think Midea Real Estate Holding will earn in the future (free profit forecasts).
It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Midea Real Estate Holding the TSR over the last 5 years was -67%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
Midea Real Estate Holding shareholders are down 37% for the year (even including dividends), but the market itself is up 45%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 11% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Even so, be aware that Midea Real Estate Holding is showing 1 warning sign in our investment analysis , you should know about...
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of undervalued small cap companies that insiders are buying.
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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