Passive investing in index funds can generate returns that roughly match the overall market. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). To wit, the Makkah Construction & Development Company (TADAWUL:4100) share price is 37% higher than it was a year ago, much better than the market return of around 25% (not including dividends) in the same period. If it can keep that out-performance up over the long term, investors will do very well! The longer term returns have not been as good, with the stock price only 11% higher than it was three years ago.
So let’s investigate and see if the longer term performance of the company has been in line with the underlying business’ progress.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. 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).
Over the last twelve months Makkah Construction & Development went from profitable to unprofitable. While some may see this as temporary, we’re a skeptical bunch, and so we’re a little surprised to see the share price go up. We might get a clue to explain the share price move by looking to other metrics.
We are skeptical of the suggestion that the 1.8% dividend yield would entice buyers to the stock. Makkah Construction & Development’s revenue actually dropped 46% over last year. So using a snapshot of key business metrics doesn’t give us a good picture of why the market is bidding up the stock.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
A Different Perspective
It’s nice to see that Makkah Construction & Development shareholders have received a total shareholder return of 37% over the last year. Of course, that includes the dividend. That certainly beats the loss of about 0.7% per year over the last half decade. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For example, we’ve discovered 2 warning signs for Makkah Construction & Development (1 is a bit unpleasant!) that you should be aware of before investing here.
We will like Makkah Construction & Development better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on SA exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.