How to Use the Industry Outlook to Predict the Success of Penny Stocks - dummies

How to Use the Industry Outlook to Predict the Success of Penny Stocks

By Peter Leeds

Successful penny stock investors use business outlooks to predict when to buy penny stocks. A business outlook is a set of expectations for future demand, supply, and prices. Executives generate outlooks for their companies in order to best react to the coming trends; investors generate outlooks so they can profit from stocks in growing businesses.

The outlook for an industry group or economic sector can give you clues as to how well the underlying businesses should perform. Will the company have the wind at its back, or are the coming months and years going to be an uphill battle?

An outlook could involve individual specific aspects for the analysis, such as a rising demand for coal or decreasing automobile sales. Alternatively, the analysis could be very involved and look at every single aspect of an industry and even review each single company operating in that space.

The outlook for any given industry or sector is developed by any and all of the following:

  • The companies themselves: Corporations can justify their actions, vision, and share price by referring to an industry outlook they develop themselves. A forestry stock could cite growth in home building in their area. Outlooks prepared by specific companies are generally positive about their sector and are often used to justify higher shares prices through the suggestion of growth to come. Outlooks also help companies prepare for future scenarios.

  • Analysts who cover the industry or sector: Major brokerage houses and investment banks typically have analysts who are focused on a specific industry group. These analysts may act on their research, such as by administering a mutual fund. They may also issue their outlook for the industry either publicly or to specific individuals.

  • Investors: If you’re going to trade stocks in a certain industry, you may want to develop an outlook for that segment of the economy. By reading trade publications, trusted media sources, and the outlooks issued by professional analysts, you should have a pretty good understanding of what to expect.

Whether you’re emboldened by an optimistic outlook for a sector or you see warning signs of slowing growth, proper analysis of what to expect from the space should help you develop your trading decisions.

Microeconomic influences on penny stocks

Microeconomics refers to decisions and purchases by individuals and organizations. For example, the ways a company produces its product, buys the necessary supplies, and prices its wares are microeconomic decisions. Purchase decisions by individual consumers, or hiring decisions by a specific firm, also impact the microeconomy. Individual corporations and people collectively create the microeconomy.

Keep an eye on the microeconomic influences affecting any penny stocks you’re interested in. Obtaining new customers, attracting effective employees, and covering expenses such as fuel, property taxes, and rent will drive their success. All these factors, and numerous others, are microeconomic.

Of the numerous microeconomic influences, some that may affect your penny stock investments include

  • Purchase decisions by consumers or by corporations

  • Attracting or losing customers

  • Gasoline prices

  • Property taxes

  • Commodity prices (steel, oil, silver, and so on)

  • Increasing wages

  • Commercial rental payments or rental availability

For example, if gasoline prices double, the price increase would be detrimental to courier and transportation companies. Less expensive steel would enable lower costs for vehicle manufacturers, and thus greater profits. If average wages moved higher, employee-heavy businesses would see increasing operational expenses.

Microeconomic influences can impact a specific company or penny stock. In fact, penny stocks get the majority of their price direction from the influences and results of microeconomic factors.

Macroeconomic influences on penny stocks

Macroeconomics refers to the big picture of the economy. Issues that affect the economy as a whole, such as national debt, the unemployment rate, and the growth rate of the entire country’s production, are macroeconomic items. In other words, entire nations, trade blocks, or continents — or even the entire world as a whole — are each macroeconomies.

Several macroeconomic factors that may affect your investments include

  • Gross domestic product (GDP)

  • Money supply

  • Taxes

  • National savings

  • Unemployment rate

  • Inflation and deflation

For example, if taxes on corporations are doubled, you can expect profits to fall and growth to slow nationwide. If there is an increase in the average national savings, consumers will have more capacity to make purchases, which could benefit retailers. A spike in the unemployment rate would reflect an increasing number of people looking for work, which may be good for industries heavily reliant on a larger workforce.

By taking the macroeconomic influences into account, you should have more clarity with your penny stock investment decisions, and therefore have more trading success.

Keep your macros and micros straight for penny stocks

In general, a company will have control over its microeconomic choices. In contrast, it will have no control over the bigger macroeconomic events.

By distinguishing between the two types of events, you will be able to anticipate if a company can do anything to change the situation, or if their best approach is to adapt to the larger event that is beyond the company’s influence.

For example, if a company is having a hard time finding enough workers because it offers a low wage compared to other business in the area (microeconomic situation), it could offer higher wages or hire a headhunting firm. If the unemployment rate drops to 1 percent (macroeconomic situation), there may be nothing that company can do to get enough workers.