Penny Stocks For Dummies
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You will get the best results from your phone call to a penny stock company if you ask the best questions. Avoid dead-end and vague queries, and instead ask focused questions that require the contact to answer with specific, detailed answers.

Some examples of great questions that you should ask management or IR personnel include the following:

  • What is the current headcount at your company? Follow up with "What was it two years ago?" "Where do you expect headcount to be in a year?" "How does this compare to your main competitors?"

You will get an idea of whether the total number of employees is increasing or decreasing. If you see any significant trend, probe deeper. "Why is the headcount increasing so quickly?" "Are you able to get enough skilled workers that quickly?" "Is this rapid growth changing the culture of the company?" "What is your company's employee turnover rate?" "How does this compare to the industry's turnover rate?" "Why is your company's turnover so much higher/lower?"

  • On the quarterly financials, you cite $3 million in revenues. What percentage of this is from sales overseas compared to here at home? Follow up with, "Do you expect this breakdown to change, and how?"

You want to understand where the growth in revenues is primarily coming from and where the company is expecting the majority of its future sales increases to be generated.

  • Who do you consider to be your main direct competitors? Your main indirect competitors? The answers might surprise you. A fitness gym may have a direct competitor in the form of a gym down the road, but its indirect competition may be weight-loss pills and weight-loss surgery.

You need to hear this from them, so that you can assess if they really understand what they're up against.

  • How many of the employees have been with this company for less than two years? This will give you insights into company growth, employee loyalty, and turnover. It also tells you how many of the workers have extensive experience with that particular company.
  • Where did you work before, and how long ago was that? Why did you leave? Getting a good sense of key personnel's experience will tell you volumes about how effective they were in previous roles.
  • How would your competitors describe your product? How would your customers describe your products? Management is often blind to their own weaknesses, making it harder for you to discover the negatives. When you pose the questions like those above, you will often get a more accurate and substantive answer.
  • What do you feel will be the sales drivers for this company? They can't tell you an exact price of where they expect the shares to trade (it's against the law), but they can tell you where the company's growth will come from. From this, you should be able to understand if the shares are likely to move higher.
  • What is your attrition rate (meaning what percentage of customers stop using your service) and why? Companies that have high customer turnover are in a constant struggle to find new ones. Companies that retain current customers benefit from predictable and recurring revenues.
  • How many years can your mine/well produce at the current rate before the resource runs out? (also known as the reserve life index, or RLI) Some resource extraction companies have great financial results and strength for now, but their wells are close to running dry or their mine is almost tapped out, meaning that they won't be producing strong results for much longer. Never invest in resource penny stocks unless you know how many years of reserves they have remaining.
  • Will you need to raise more money to keep operations going? Please outline how much, when, and the potential sources. Penny stocks that are constantly in need of more money can dilute shareholders by dumping more shares onto the market. You will want an understanding of how much investment a penny stock anticipates it will need, and how the company plans to go about securing those funds.
  • The growth rate for your industry is 6 percent, which is double what your company reported on the last quarterly financials. How will you close this gap, and what is the exact growth target? Questions comparing a company to industry trends are fair game, and such questions are certainly very important. You want to find those penny stocks that are outperforming their peers or that at least have a plan to do that.

About This Article

This article is from the book:

About the book author:

Peter Leeds, also known as The Penny Stock Professional, is the publisher of Peter Leeds Penny Stocks, a popular financial publication with over 50,000 subscribers. He is also the author of Invest in Penny Stocks.

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