The simplest way to benefit from a rising market is to buy an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. Investors in MMJ Group Holdings Limited (ASX:MMJ) have tasted that bitter downside in the last year, as the share price dropped 19%. That's well bellow the market return of 12%. However, the longer term returns haven't been so bad, with the stock down 4.0% in the last three years.
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.
During the unfortunate twelve months during which the MMJ Group Holdings share price fell, it actually saw its earnings per share (EPS) improve by 292%. Of course, the situation might betray previous over-optimism about growth.
The divergence between the EPS and the share price is quite notable, during the year. So it's easy to justify a look at some other metrics.
Revenue was fairly steady year on year, which isn't usually such a bad thing. However, it is certainly possible the market was expecting an uptick in revenue, and that the share price fall reflects that disappointment.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
This free interactive report on MMJ Group Holdings's balance sheet strength is a great place to start, if you want to investigate the stock further.
A Different Perspective
MMJ Group Holdings shareholders are down 19% for the year, but the broader market is up 12%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. The three-year loss of 1.4% per year isn't as bad as the last twelve months, suggesting that the company has not been able to convince the market it has solved its problems. Although Warren Buffett famously said he likes to 'buy when there is blood on the streets', he also focusses on high quality stocks with solid prospects. Before spending more time on MMJ Group Holdings it might be wise to click here to see if insiders have been buying or selling shares.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.