Venture Corporation Ltd’s Shares Are Up by 8% in A Year: What’s Next?

As the title above states, contract manufacturer Venture Corporation Ltd (SGX: V03) has seen its shares climb by 8% compared to a year ago. Where might its shares move next?

A simple framework

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.

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 rise  

To gain some understanding of Venture Corp’s price decline, we can track changes in simple but important financial metrics like the earnings per share (EPS) and price to earnings (PE ratio); these numbers could also be a simple way for you to track the progress of any company over time and can form part of your investment journal entries.

In the table below, I have summarised how Venture Corp’s EPS, PE ratio, and stock price have changed over the past year:

2015-10 Venture Table

Source: Google Finance; Earnings Presentation

As you can tell, Venture Corp’s stock price had been supported by slight increases in both the firm’s EPS and PE ratio.

Venture Corp’s most recent quarter was a solid one with quarterly revenue and EPS rising by 10% and 7.4% year-on-year, respectively. Higher shipments and favorable exchange rate movements had supported growth on both ends.

Meanwhile, Venture Corp also reported a solid balance sheet with a net cash position of $155 million as of 30 June 2015. A strong balance sheet would be important as management remained cautious about the firm’s future outlook based on customer feedback.

Venture Corp’s shares are currently valued at only a slight premium to the broader market. To that point, the PE ratio of the SPDR STI ETF (SGX: ES3), an exchange-traded fund which mimics the fundamentals of the Straits Times Index (SGX: ^STI), is less than 12.

Foolish takeaway

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.