What to Do with Corporate and Analyst Guidance for Your Penny Stock - dummies

What to Do with Corporate and Analyst Guidance for Your Penny Stock

By Peter Leeds

Guidance numbers are simply projections of the range of expected penny stock financial results, such as sales between $1.2 to $1.4 million for Q3. The most popular guidance numbers involve earnings per share, total revenues, and/or operating margins. They also sometimes may include additional or alternative financial data, such as debt load, cash levels, or whichever metrics they best expect will tell their company’s story.

Companies are not legally required to calculate and publish guidance numbers, and a minority of penny stock companies actually does this. Sometimes professional stock market analysts generate their own guidance numbers for penny stock companies based on their own reviews. Additionally, because issuing guidance numbers is optional, companies also get to choose which financial details to provide.

Guidance can have positive or negative effects on the price of the company’s shares, based mainly on whether the anticipated numbers are higher or lower than what the market was already expecting. If the company surprises the market by announcing an expectation that revenues will be doubled, this will generally (and almost instantly) drive prices higher. The same effect can hold true in reverse.

If the company or an analyst issues guidance, watch to see if the actual numbers come close to the prediction. Some companies or analysts regularly issue guidance and just as regularly hit the expectations, which means you can have a higher degree of trust in their predictions. Other companies or analysts seem to have difficulty hitting the mark, and in that case you should be wary of their guidance numbers.

The type of company also impacts the accuracy with which they are able to provide guidance. A volatile penny stock engaged in an unpredictable industry, such as a movie production company, may not provide any expectations or their numbers may be wildly off from one quarter to the next. A penny stock with a set number of subscribers on a recurring billing plan should be able to provide accurate guidance.

Management and IR of any publicly traded company have an obligation to speak and report honestly, to the best of their knowledge. Doing so keeps them in good standing with the stock exchange and out of trouble with regulatory bodies. If the CEO mentions that his company is debt free, he had better be right or at least believe that the information they’re disseminating is correct.

Should you trust guidance issued by the penny stock company?

Following corporate guidance is a reliable method of knowing what to expect from a company. While corporate guidance is much less common among penny stocks than among blue-chip stocks, you should definitely take advantage of it when available.

The combination of a penny stock having access to its own ongoing financial numbers on a day-to-day basis and the legal requirement for materially important statements by management to be relatively accurate, means that guidance issued by a company is generally close to correct.

If a penny stock says that it expects sales for Q4 to fall between $3 and $4.5 million and earnings generated from operations to equal 1¢ to 2¢ per share, they will usually have final results that fall within those indicated ranges.

As events take place that lead management to believe that the company will exceed or fall short of its previously issued guidance, the company can adjust its expectations. Using the example numbers above, the company may report that it now expects sales to fall between $4 to $5 million with earnings of 1.5¢ to 2.5¢ per share.

If the company doesn’t want to provide new ranges or quantifiable data, it may issue a press release that sales are expected to come in at the high (or low) end of the previously issued guidance.

Penny stock analyst guidance

Professional analysts often follow specific companies and generate guidance about those companies based on their calculations. Such analyst guidance is generally rare among smaller or penny stock companies, so if given, you should take their outlook into consideration.

The analysts work for brokerage firms and investment banks, and part of their job is to generate an opinion on the underlying stock in order to determine whether to buy, sell, or hold. They, and their parent companies, have reputations to maintain, and so it stands to reason that the analysts are providing an honest assessment of a stock when they issue an opinion.

Because analysts generally don’t have access to information that the companies haven’t made public, they are only able to provide educated guesses.

Use analyst expectations as a guide in your own research, but don’t rely on the information until they have proven themselves to you through a history of making accurate guesses. Also, put more stake in more opinions — that is, if ten analysts agree that earnings will hit a certain level, you can rely on this information to a greater degree.

Generate your own penny stock guidance data

Generating your own guidance data is one of the best ways to position yourself to profit from low-priced shares, but doing so takes a significant amount of work.

If you know how many units of a product a company sold, what its growth rate in product sales is, and how much of each sale becomes profit, then you can calculate your own estimates. Picture fictitious FFFF company. If it sold 1 million units last quarter and sales have been growing by 5 percent per quarter, you can postulate that it will sell about 1,050,000 units this next quarter.

If you know that the company makes a profit of $2 per unit, its total profit will be up from $2 million to $2.1 million. If it has 10 million shares outstanding, then its earnings will be up from 10¢ last quarter to 11¢ this quarter.

When you calculate guidance, you want to focus on total revenues, profit margins, earnings per share, and debt load.