The Dow Jones industrial average made 500-point swings on several occasions in August. After peaking at 12,724 on July 21, the index plunged to 10,809 on August 8, and traded below 11,000 on August 10 and 19.
Is it possible to make short-term trades to profit from the volatility?
Benjamin Graham said that in the short-term, the market behaves like a voting machine, but in the long term it acts like a weighing machine. The noise created by the volatility may distract investors, but in the long run, many solid investment opportunities exist.
Still, the market is currently dictated by negative macroeconomic pressures, including:
- Cuts in U.S. government spending
- Mild recession or slow growth
- Concerns over debt in Europe
- Lack of continued quantitative easing (QE3) in the United States
- Increased regulation for the financial sector
Companies largely dependent on government contracts will see a weak quarters. Despite organic growth in earnings (through cost cutting) achieved by Cisco Systems (CSCO), the stock will remain under pressure as it works through lower earnings from government contracts. Computer Services Corp (CSC) is also dependent on government contracts and will see continued pressure on its stock price.
As stocks approach 52-week lows, attractive investments are creating opportunities for investors with a longer-term time horizon. Investors should pay attention to companies that have a business “moat” and a healthy balance sheet to weather the anticipated global slowdown. The technology stocks listed below are worth considering:
Universal Display Corporation (PANL). The company is in the business of OLED technologies and materials that are used for such things as flat panel display and solid-state lighting. PANL bottomed at $22.80 and rallied to $51.71 on August 26 after the company licensed its product to Samsung.
Microsoft Corporation (MSFT). Microsoft is continuing to integrate its products across all products, from Xbox to mobile (Windows Phone 7/8) to desktop (Windows 7/8). The Windows 8 tablet “metro” user-interface assured the company’s relevance in a space dominated by Apple (AAPL).
Oracle Corporation (ORCL). In addition to running a highly profitable enterprise business, Oracle has two great leaders (Mark Hurd as co-president, Larry Ellison as CEO), owns patents that may be infringed by Google’s (GOOG) Android, and is trading over 25% below its peak.
Intel Corporation (INTC). Intel is susceptible to the demand cycle of computers for Apple and PC, but the demand for cloud services will keep growing. Intel’s processors are used for servers that power these services. Investors assigned an exceptionally low P/E of 9.07 for Intel because of the company’s failure to profit from the growth in the mobile space. However, investors are paid 4.2% in dividends to wait, as Intel turns its attention towards higher-growth areas. The company is still highly profitable, earning a net profit margin of nearly 30% for the last 12 months.