Investing in stocks comes with the risk that the share price will fall. And there's no doubt that Xiaomi Corporation(HKG:1810) stock has had a really bad year. In that relatively short period, the share price has plunged 57%. However, the longer term returns haven't been so bad, with the stock down 4.2% in the last three years. Furthermore, it's down 39% in about a quarter. That's not much fun for holders.
With the stock having lost 7.7% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the market place...' One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
Unfortunately Xiaomi reported an EPS drop of 8.6% for the last year. This reduction in EPS is not as bad as the 57% share price fall. So it seems the market was too confident about the business, a year ago.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
SEHK:1810 Earnings Per Share Growth April 22nd 2022
A Different Perspective
The last twelve months weren't great for Xiaomi shares, which performed worse than the market, costing holders 57%. Meanwhile, the broader market slid about 23%, likely weighing on the stock. Shareholders have lost 1.4% per year over the last three years, so the share price drop has become steeper, over the last year; a potential symptom of as yet unsolved challenges. Although Baron Rothschild famously said to "buy when there's blood in the streets, even if the blood is your own", he also focusses on high quality stocks with solid prospects. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk.We've identified 2 warning signs with Xiaomi, and understanding them should be part of your investment process.
source: simplywall.st
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