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Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. Investors in Yum China Holdings, Inc. (NYSE:YUMC) have tasted that bitter downside in the last year, as the share price dropped 30%. That falls noticeably short of the market return of around 2.0%. However, the longer term returns haven't been so bad, with the stock down 6.2% in the last three years. The falls have accelerated recently, with the share price down 16% in the last three months.
With the stock having lost 5.4% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.
See our latest analysis for Yum China Holdings
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During the unfortunate twelve months during which the Yum China Holdings share price fell, it actually saw its earnings per share (EPS) improve by 17%. It could be that the share price was previously over-hyped.
The divergence between the EPS and the share price is quite notable, during the year. But we might find some different metrics explain the share price movements better.
With a low yield of 1.1% we doubt that the dividend influences the share price much. Yum China Holdings' revenue is actually up 19% over the last year. Since the fundamental metrics don't readily explain the share price drop, there might be an opportunity if the market has overreacted.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
Yum China Holdings is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So it makes a lot of sense to check out what analysts think Yum China Holdings will earn in the future (free analyst consensus estimates)
A Different Perspective
While the broader market gained around 2.0% in the last year, Yum China Holdings shareholders lost 30% (even including dividends). Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 6% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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. For example, we've discovered 2 warning signs for Yum China Holdings that you should be aware of before investing here.