Challenger Technologies Limited’s Share Price Is Flat Over The Past Year: What’s Next?

Information technology products retailer Challenger Technologies Limited (SGX: 573) has the same share price now as compared to a year ago. Why may that be the case?

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 returns can be made out entirely of the investment return component, entirely of the speculative return component, or a mixture of both components.

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 (or lack of movement in the case of Challenger Technologies) is deserved or undeserved.

Deciphering the moving pieces

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.

You can see how Challenger Technologies’ EPS, PE ratio, and stock price have changed over the past year in the table below:

Source: Google Finance; company’s earnings report

Challenger Technologies’ EPS has risen by 19% over the last 12 months. But, its PE ratio has shrank by over 16% to less than 9 at the moment, cancelling the effect of increased earnings. This also suggests that over the past year, investors might have grown more pessimistic about the company’s prospects.

In the middle of this year, Funan Digitalife Mall closed for redevelopment that will last three years. Since Challenger Technologies’ flagship retail outlet was housed in the mall, the company has lost an important bricks-and-mortar sales outlet. The IT products retailer is responding to the (ahem) challenge with the launch of, an online tech-focused marketplace, in April this year.

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 as a result 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.