StarHub Ltd’s Shares Are Down 2% in 1 Year: Here’s What Happened

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 a stock’s 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, a stock’s price return can be made out entirely of the investment return component, entirely of the speculative return component, or a mixture of both components.

Deciphering the fall  

We can track the investment or speculative components of a stock’s return by noting down changes in its financial metrics such as its earnings per share (EPS) and price to earnings ratio (PE ratio). On a related side note, such notes 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.

The last 12 months have seen shares of Singapore’s second largest telecommunications company StarHub Ltd  (SGX: CC3) slip by 2%. Why has that been the case? In the table, I have summarized changes in the company’s EPS and PE ratio over the past year:

Source: Google Finance; company’s earnings report

The lower share price can be traced to an 11% decline in StarHub’s PE ratio compared to a year ago. This has overwhelmed the company’s 9% growth in EPS. StarHub’s lower PE ratio could be a sign that the stock market has gotten more pessimistic about the company’s business over the last 12 months.

In its latest quarterly earnings (for the three months ended 30 June 2016), StarHub lowered its guidance for the year – it projected flat revenue growth for 2016. In the previous quarter, the company’s outlook was for low single digit growth in revenue. But, StarHub had committed to keep its dividend payout in 2016 at 20 cents per share, an amount unchanged since 2010.

Foolish takeaway

If a stock’s price rises (or falls), we should try to understand if it is backed by a company’s fundamental growth (or decline), or whether it is simply a result of investor exuberance (or 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 something that happened because of the market’s irrationality. Such knowledge can help us with 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.