Earning Season is always volatile to stock prices. Traders jerk in and
out depending on the outcome of the report. For example, Texas
Instrument (TXN) reported that its third quarter earning of 2005 rising
12% year over year. And yet, TXN fell after hour due to weak forecast.
The game now is the expectation game. If the company beats, share price
normally rise. If it doesn't, share price plunge.
There are ways to beat the expectation game and reduce volatility to
your portfolio. You do not have to wait for the press release and wait
nervously whether your company beat or miss expectation. One way is to
buy company with a modest expectation. The definition of modest varies
among individuals but to me, modest expectation has a forward P/E ratio
of less than 10. What happens when a company with modest expectation
miss expectation? While, share price may get clobbered, I don't think
it will move much. Why? Because P/E of 10 already incorporates a 0% EPS
growth. Even if EPS stays constant for the next ten years, company with
P/E of 10 will return its shareholder roughly 10% a year.
Another way is to pick company that has predictable cash flow and
dividend payment. Investors hate uncertainty. Companies that pay
dividends eliminate some of that uncertainty. For example, a stock has
a 4% dividend yield and it misses expectation for the quarter. The
stock might tumble, pushing the dividend yield up to 4.2 or 4.5 %. By
then, a lot of value investors will be interested in owning the stock
and the drop in stock price will be less severe.
Finally, the last way to reduce volatility is to pick up companies with
cash rich balance sheet. Some companies may have cash up to half of
their market capitalization. For example, OmniVision Technologies Inc.
(OVTI) has a market capitalization of $ 720 M. It has $ 300M in net
cash, about 41.6% of market cap. With $ 300 M in cash cushion, it is
hard to imagine the company to have market capitalization below $ 300
M. It is possible, but it is uncommon.
