Why Has Super Group Ltd Dropped By 43.7% in One Year?

There can be good reasons as well as poor reasons for why a stock’s price moves.

For the Foolish investor, understanding the right reason is important. If we can determine the reason, we may get an inkling on whether the movement in the stock price is deserved or undeserved and thus act accordingly.

A simple framework

To help with this, I would like to defer to a couple of paragraphs from The Little Book that Builds Wealth by author and fund manager Pat Dorsey:

“Over long stretches of time, there are just two things that push a stock up or down: The investment return, driven by earnings growth and dividends, and the speculative return, driven by changes in the price-earnings (P/E) ratio.

Think of the investment return as reflecting a company’s financial performance, and the speculative return as reflecting the exuberance or pessimism of other investors.”

Under Dorsey’s framework, stock price returns can be from the deserved-end of the spectrum (investment return), the undeserved-end of the spectrum (speculative return), or anywhere in between.

Keeping a journal

We can track the reasons for a stock’s movement by noting down simple but important financial metrics like its earnings per share (EPS) and PE ratio; they could also be a simple way for you to track the progress of a company over time and can form a crucial part of your investment journal.

Let’s use food and beverage purveyor Super Group Ltd (SGX: S10) as an example in here. Below, I have summarized the company’s EPS, PE ratio, and the change for each element compared to a year ago:

2015-08 Super Group Fall Table

Source: Google Finance; earnings report

As you can see, the 43.7% decrease in Super Group’s stock price had mostly been caused by a stock market which has grown increasingly pessimistic about the F&B outfit’s business. This is shown by Super Group carrying a PE ratio now which is lower by 30.5% from a year ago.

Part of the reason for the market’s pessimism could be due to the lower revenue and earnings that the company has recorded recently. A weak outlook for regional consumer spending and a 20% fall for the general stock market in Singapore, are other possible reasons to explain why Super Group’s share price is currently beaten down.

There are some positives to the story here. The F&B outfit has a strong balance sheet (it has a net cash position) and reported positive free cash flow in its latest earnings release. It may take more than these to weather the short-term storms ahead, but they form a solid financial base that Super Group can build on.

Foolish takeaway

With that in mind, the Foolish investor may be in a better position to judge whether the current pessimism (in the form of a lower PE ratio) for Super Group’s future is justified.

If a stock price rises (or falls), we should try to understand if it is backed by a company’s fundamental growth (decline), or whether it is simply a result of investor exuberance (pessimism).

When we understand the difference, we may become a better judge on whether our stock price gains are justified – with commensurate growth in earnings – or just a gift from the stock market. While luck is always welcome, Foolish investors could be better off with the former over the long-term.

To learn more about Foolish investing and to keep up to date on the latest financial and stock market news, sign up for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore

Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Super Group