It’s been almost a month since the first half of 2014 came to a close on 30 June 2014. But, that doesn’t mean that it’s too late to look back on some of the Straits Times Index’s (SGX: ^STI) best performing constituents in that period to see if there are any valuable takeaways. So, the four shares with the best performance in the first half of 2014 are namely Olam International (SGX: O32), Noble Group (SGX: N21), ComfortDelGro Corporation (SGX: C52), and Jardine Cycle & Carriage (SGX: C07). The table immediately below gives a better picture of how…
It’s been almost a month since the first half of 2014 came to a close on 30 June 2014. But, that doesn’t mean that it’s too late to look back on some of the Straits Times Index’s (SGX: ^STI) best performing constituents in that period to see if there are any valuable takeaways.
So, the four shares with the best performance in the first half of 2014 are namely Olam International (SGX: O32), Noble Group (SGX: N21), ComfortDelGro Corporation (SGX: C52), and Jardine Cycle & Carriage (SGX: C07). The table immediately below gives a better picture of how they fared:
|Share||Price: 1 January 2014||Price: 30 June 2014||% Change|
Source: S&P Capital IQ
For some context, the Straits Times Index had gained only 2.8% in the same period. So, the aforementioned blue chips have really turned in a great performance.
If I were to dig deeper into the numbers, here’s something interesting:
|Share||TTM PE*: 1 January 2014||TTM PE*: 30 June 2014||% Change|
*TTM PE stands for Trailing 12 months’ Price/Earnings ratio
Source: S&P Capital IQ
From a valuation perspective (based on the shares’ trailing PE ratios), Olam International and Noble Group had actually become cheaper despite having substantial gains in their share prices; this came about as the duo’s earnings per share had increased by 88% and 50% respectively between 1 January 2014 and 30 June 2014.
ComfortDelGro Corporation and Jardine Cycle & Carriage on the other hand, had become more expensive by virtue of having their share prices increase at a much faster pace than their earnings; both companies’ profits have, respectively, gained 1.9% and slipped by 1.7%.
|Share||TTM EPS*: 1 January 2014||TTM EPS*: 30 June 2014||% Change|
*TTM EPS stands for Trailing 12 months’ Earnings Per Share; figures are in Singapore cents
Source: S&P Capital IQ
This got me thinking: How is it that anaemic growth (or no growth, in the case of Jardine Cycle & Carriage) in corporate profits could still bring about sizeable share price gains? In my opinion, there are two equally possible reasons.
The first is that ComfortDelGro Corporation and Jardine Cycle & Carriage were just priced too low in relation to their businesses’ real economic values at the start of the year. When a share’s priced cheap enough, there’s no need for positive changes to happen for an investor to make a profit.
The second is that the market’s perceptions on the futures of ComfortDelGro Corporation and Jardine Cycle & Carriage have for some reason or another, changed for the better. This brings to my mind something really interesting about the share market that my American colleague Morgan Housel once shared:
“Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That’s really all there is to it.
The dividend yield we know: It’s currently 2% [referring to the American share market back in May 2013]. A reasonable guess of future earnings growth is 5% per year [again, referring to corporate America].
What about the change in earnings multiples? That’s totally unknowable.
Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?
If someone said, “I think most people will be in a 10% better mood in the year 2023,” we’d call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.”
Foolish Bottom Line
Can that possible surge in optimism for ComfortDelGro Corporation and Jardine Cycle & Carriage’s shares carry on? There’s no way I can tell. But what I know is this: If a company has businesses that would bring in substantially higher profits 5, 10, even 20 years from now, then better days for its shares are likely to be ahead years into the future.
We can’t tell how optimistic or pessimistic the market would be about those shares when the time comes. But, it’s also good to know that a company which manages to grow its profits materially higher years into the future would carry an intrinsic value at that point in time that’s a lot higher than what it is now. And as investors, it’s a company’s intrinsic value and its changes that we really should focus upon.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.