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Passive investing in index funds can generate returns that roughly match the overall market. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). For example, the Hebei Construction Group Corporation Limited (HKG:1727) share price is up 26% in the last year, clearly besting than the market return of around -6.5% (not including dividends). That's a solid performance by our standards! We'll need to follow Hebei Construction Group for a while to get a better sense of its share price trend, since it hasn't been listed for particularly long.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 last year, Hebei Construction Group actually saw its earnings per share drop 19%. Given the share price gain, we doubt the market is measuring progress with EPS. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.
Absent any improvement, we don't think a thirst for dividends is pushing up the Hebei Construction Group's share price. Rather, we'd posit that the revenue increase of 13% might be more meaningful. Revenue growth often does precede earnings growth, so some investors might be willing to forgo profits today because they have their eyes fixed firmly on the future.
The image below shows how earnings and revenue have 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. So we recommend checking out this free report showing consensus forecasts
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Hebei Construction Group the TSR over the last year was 33%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
Hebei Construction Group shareholders should be happy with the total gain of 33% over the last twelve months, including dividends. Unfortunately the share price is down 1.5% over the last quarter. Shorter term share price moves often don't signify much about the business itself. If you would like to research Hebei Construction Group in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
But note: Hebei Construction Group may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK 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 email@example.com. 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.