While the overall market has its ups and downs, individual stocks can have more extreme moves. When a company has an extreme rally higher, its shares may be more susceptible to a pullback. The reverse is true when a company has been falling relative to peers.
This concept is known as reversion to the mean. And it’s a sign that investors might be able to find buying opportunities in beaten-down stocks. Or traders can find overpriced stocks to target for a drop.
Right now, a reversion to the mean trend looks possible in Paramount Global (PARA). Besides missing on earnings last week, the company slashed its dividend, which sent many investors toward the exit.
However, amid that bad news, the company fared well with its streaming numbers, and earnings could see improvement in the coming quarters.
With shares down 38 percent over the past year, it’s possible that the stock will trend higher in time.
Action to take: Paramount is now trading for about half its book value, likely undervaluing the company’s intellectual properties. The new yield on shares works out to 1.2 percent. That’s not large, but with expectations so low, there’s some payment while waiting for shares to recover.
For traders, the September $20 calls, last going for about $0.90, offer mid-double-digit returns or better on a recovery in shares from here.
Disclosure: The author of this article has a position in the company mentioned here, and may further trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.