Even the best stock pickers will make plenty of bad investments. And there’s no doubt that HMC Capital Limited (ASX:HMC) stock has had a really bad year. The share price is down a hefty 56% in that time. However, the longer term returns haven’t been so bad, with the stock down 26% in the last three years. The falls have accelerated recently, with the share price down 28% in the last three months.
If the past week is anything to go by, investor sentiment for HMC Capital isn’t positive, so let’s see if there’s a mismatch between fundamentals and the share price.
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 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 the unfortunate twelve months during which the HMC Capital share price fell, it actually saw its earnings per share (EPS) improve by 95%. It’s quite possible that growth expectations may have been unreasonable in the past.
It’s fair to say that the share price does not seem to be reflecting the EPS growth. So it’s easy to justify a look at some other metrics.
HMC Capital managed to grow revenue over the last year, which is usually a real positive. Since the fundamental metrics don’t readily explain the share price drop, there might be an opportunity if the market has overreacted.
The company’s revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
It’s good to see that there was some significant insider buying in the last three months. That’s a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. If you are thinking of buying or selling HMC Capital stock, you should check out this free report showing analyst profit forecasts.
HMC Capital shareholders are down 55% for the year (even including dividends), but the market itself is up 11%. 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. Longer term investors wouldn’t be so upset, since they would have made 3%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. It’s always interesting to track share price performance over the longer term. But to understand HMC Capital better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We’ve identified 2 warning signs with HMC Capital , and understanding them should be part of your investment process.