Investors often take a current trend and extrapolate it to extremes. That’s why the end of a bull market has a lot of valuations that seem ridiculous in hindsight. And why there are many bargains at the end of a bear market.
That trend can also play out with quarterly earnings. A company’s growth may slow or stall out in a quarter, but markets may try and extend that trend out indefinitely. That can create short and long-term opportunities.
For instance, last week telecom giant
AT&T (T) reported a slowdown in the rate of subscriber growth compared to the same quarter last year.
That sent shares down over 10 percent in a day. But there’s still growth, and such a slowdown is no guarantee of a future trend. And if the company can increase its profitability, a slowing rate of growth can be more than offset by improved profits.
The telecom now trades at about 8 times earnings, a reasonable valuation for a telecom. And shares pay 5.6 percent here, a high yield more than supported by the current rate of company earnings.
Action to take: Investors may like shares here. Despite the drop, shares are still well off of last year’s lows, and this could be a reasonable entry price for long-term dividend investors to buy into.
For traders, a rebound from the earnings drop is likely in the months ahead. The July $19 calls, last going for about $0.30, could deliver high double-digit returns or better in the weeks ahead.
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 of the companies mentioned in this article.