We think intelligent long term investing is the way to go. But along the way some stocks are going to perform badly. To wit, the China XD Plastics Company Limited (NASDAQ:CXDC) share price managed to fall 62% over five long years. That's an unpleasant experience for long term holders. And we doubt long term believers are the only worried holders, since the stock price has declined 30% over the last twelve months. There was little comfort for shareholders in the last week as the price declined a further 3.9%.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.
Looking back five years, both China XD Plastics's share price and EPS declined; the latter at a rate of 13% per year. Readers should note that the share price has fallen faster than the EPS, at a rate of 17% per year, over the period. This implies that the market was previously too optimistic about the stock. The less favorable sentiment is reflected in its current P/E ratio of 2.01.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It might be well worthwhile taking a look at our free report on China XD Plastics's earnings, revenue and cash flow.
A Different Perspective
China XD Plastics shareholders are down 30% for the year, but the market itself is up 8.1%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 17% over the last half decade. We realise that Buffett 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 businesses. You could get a better understanding of China XD Plastics's growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
We will like China XD Plastics better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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.