Singapore Press Holdings Limited’s Shares Have Fallen Almost 9% In A Year: What’s Next?

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.

Deciphering the fall  

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 price to earnings (PE ratio); they could also be a simple way for you to track the progress of a company over time and can form part of your investment journal entries.

Let’s use publishing giant Singapore Press Holdings Limited  (SGX: T39) as an example. The table below shows how the EPS, PE ratio, and stock price of Singapore Press Holdings – better known as SPH – have changed compared to a year ago:

2015-10 SPH Table

Source: Google Finance; Earnings Report

As you can tell, SPH’s EPS and PE ratio have walked contrasting paths over the past year. While the former had grown by 14.3%, the latter had shrunk by 20%. The two developments combined to result in SPH’s 8.6% stock price decline.

There may be a number of reasons why the stock market has soured on the newspaper publisher’s shares (alluded to by the falling PE ratio).

One major reason could be this: SPH’s all-important newspaper and magazine segment has seen both its revenue and profit dwindle over the company’s past five fiscal years. This is an area of concern for SPH as the segment had accounted for 77% of total revenue in the fiscal year ended 31 August 2014 (FY2014).

But, SPH may have also just been dragged down by the general market malaise over the past few months with the Straits Times Index (SGX: ^STI) having entered bear market territory on Monday.

Foolish takeaway

With all the above in mind, the Foolish investor may be in a better position to judge SPH’s future.

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 a stock’s price gains (losses) are justified – with commensurate growth (decline) in earnings – or had happened because of the market’s irrationality. Such knowledge can then aid us in our decision making.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.