Volatility, Scared?

volatility in earning season

The Earning period can best be defined by the volatility of a market. Many traders place and execute trades based on the reports that are being availed. For instance, Texas Instrument reported that it has realized a consistent rise in its third quarter earnings of 2005-12% every subsequent year. Now, this becomes a game of waiting and if a company beats the projections share prices rise, if not the prices head south.

There is always a way that you can go around the wait game and never be pressurized and anxiously wait for the outcome of the company reports. You do not need to queasy as you wait for the press release, nor be subject to speculation on what the outcome will be. The best way not to subject yourself under such pressure is to always go for a company with moderate expectation. As a fact, there are different interpretation of the modes, but what I can say is that it is a company that has an overall P/E ratio of not more than 10. In case such companies miss expectation, prices will definitely be affected but not in such a big way. The main reason for this the EPS, for this matter P/E ratio of not more than 10 incorporates a 10. It does matter how long this stays, shareholders of such companies will always get an estimated 10% in returns.

Another important thing that you can do is to pick a company that has a consistent percentage of dividends paid out and reliable cash flow. These are the kind of companies that will almost eliminate uncertainty and this is always a plus for investors who are looking out to invest. For instance, if a company with stock yield averaging 4% does not meet the quarterly expectations, then stocks might stumble. However, the dividend yield goes up to about 4.2 % or up to 4.5%. In this particular scenario, many savvy investors will see this as an opportunity to invest in stocks so the prices will not be severe.

Lastly, a proven way to buffer against the volatility of the market is to go for companies that have high rates of cash flows. Remember, some companies can have only but half of market capitalization. A good example is OmniVision Technologies, INC, which has a market capitalization of $700 but net cash of $300m. Overall, this is about 41.6% of the total cap. And with a cushion of $300 M, it’s rare for any company to have a market capitalization of less than $300 M in total. While trading, always consider this fundamental factor at all times.