Some companies make their profits because they benefit from a network effect. Simply put, the more users there are on a network, the more valuable that network is. Companies that advertise to that network or support that network benefit from large or growing networks.
Investors who buy companies that can benefit from the network effect when they’re trading lower can earn above-average returns over time thanks to this powerful effect.
One example of a network is the network of smartphones. Companies that provide access to cell networks tend to earn steady, and above-average returns over time.
In this space, Verizon (VZ) looks like a reasonable buying opportunity now. Shares dropped following their latest earnings, even as their consumer business showed signs of improvement.
Today, Verizon shares trade at 9 times forward earnings. And with revenues improving, the company could be on the verge of growing its earnings over the next few quarters.
Action to take: Investors may like shares here, as the stock has some upside potential following its latest earnings report and selloff. Verizon is also a big dividend payer, with a 6.5% current yield.
For traders, the July $40 calls, last trading for about $1.08, could see high double-digit returns on a bounce higher for shares in the coming months.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.