Stock prices always go up and down during earnings season. Traders jump in and out of the market based on what the report says. For example, Texas Instruments (TXN) said that its earnings for the third quarter of 2005 were up 12 percent from the same time last year. Still, TXN fell hour after hour because the forecast was bad. Now, the game is about what people expect. When a company does well, the share price tends to go up. If it doesn't, the price of shares will fall.
There are ways to win the "expectations game" and make your portfolio less volatile. You don't have to wait for the press release and worry about whether or not your company did better than expected. One way is to buy a company and have low hopes for it. People have different ideas about what is "modest," but I think a forward P/E ratio of less than 10 is a good measure. What happens when a company has low expectations and doesn't meet them? Even though the share price might take a hit, I don't think it will change much. Why? Because a P/E of 10 already takes into account an EPS growth of 0%. Even if earnings per share (EPS) stays the same for the next ten years, a company with a P/E of 10 will still return about 10% a year to its shareholders.
Another way is to choose a company that has a steady flow of cash and pays dividends. Uncertainty is bad for investors. Some of that uncertainty is taken away by companies that pay dividends. For example, a stock's dividend yield is 4%, but it falls short of what was expected for the quarter. If the stock goes down, the dividend yield could go up to 4.2% or 4.5%. By then, a lot of value investors will want to buy the stock, and the price drop won't be as bad.
The last way to lower volatility is to buy stocks in companies with a lot of cash on hand. Some companies could have as much cash as half of their market value. For example, the market capitalization of OmniVision Technologies Inc. (OVTI) is $ 720 M. It has net cash of $300 million, which is about 41.6% of its market value. With $300 million in cash on hand, it's hard to see how the company could be worth less than $300 million on the stock market. It's possible, but not very likely.
